Chapter 8: Costs of Production Flashcards
What is an economic costs?
the cost of using resources to produce a product, which is an oppurtunity cost: the value or worth of the resources in its best alternative use
What are explicit costs?
the monetary payments that a firm makes to obtain resources from non owners of the firm
What are implicit costs?
the monetary payments that would have been paid for self-owned or self-employed resources if they had been used in their next best alternative outside the firm
What is normal profit?
an implicit cost and is the minimum payment that entreprenuers must recieve for performing the entreprenurial functions for the firm
What is economic profit?
the revenue a firm recieves in excess of all its explicit and implicit economic costs
What is total product?
the total quantity of output produced
What is marginal product?
the change made in total product from a change in a variable resources
What is average product?
the total product per unit of resource input
What is the law of diminishing returns?
as more untis of a variable resource are added to a fixed resource, beyond some point the marginal prodcut from each additional unit of a variable resource will begin to decline
What are total costs?
the sum of the firm’s fixed costs and variable costs
As output increases, what happens to fixed costs?
do not change
As output increases, what happens to variable costs?
they increase at a decreasing rate, and then increase at an increasing rate
As output increases, what happens to total costs?
increase at a decreasing rate, then increase at an increasing rate
What do average costs consist of?
average fixed costs, average variable costs, and average total costs
As output increases, what happens to average fixed cost?
decreases
As output increases, what happens to average variable costs?
decreases and then increases
As output increases, what happens to average total cost?
decreases then increases
What is marginal cost?
the extra cost incurred in producting one additional unit of output
What are long run production costs?
ALL variable costs
Explain economies/diseconomies of scale?
as the firm expands its output by increasing the size of its plant, average total cost tends to fall at first because of economies of scale, but as this expansion continues, sooner or later, average total cost begins to rise because of the diseconomies of scale
Why do economies of scale arise?
because of labor specialization
What are constant returns to scale?
the range of output where long-run average total costs does not change
