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AP Economics > Cost of Production > Flashcards

Cost of Production Flashcards

1
Q

Profit Equation:

A

Total Revenue−Total Cost

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2
Q

Explicit Costs require

A

money outlay.

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3
Q

Implicit Costs…

A

Value of benefits forgone.

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4
Q

How do you solve for Accounting Profit?

A

Total revenue - explicit costs & depreciation.

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5
Q

How do you solve for Economic Profit?

A

Total revenue - explicit costs, depreciation, & implicit costs.

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6
Q

Economic profit is always…

A

less than accounting profit

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7
Q

Interpretation of Economic Profit:

Positive…

A

Current use is best for resources

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8
Q

Negative…

A

Better alternative use exists.

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9
Q

Zero (Normal profit)…

A

Current use is optimal.

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10
Q

Phase 1: Increasing at an Increasing Rate

A

Description: In this phase, total product (TP) is on the rise and increasing at an accelerating rate.
Significance: Indicates efficient utilization of inputs, leading to a substantial output boost.

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11
Q

Phase 2: Increasing at a Decreasing Rate

A

Description: TP continues to grow but at a slower pace than in the previous phase.
Significance: Reflects that additional inputs contribute to output, but with diminishing returns compared to the initial phase.

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12
Q

Phase 3: TP at Max; Then Decreases

A

Description: TP reaches its maximum point and starts declining afterward.
Significance: Indicates the point of diminishing returns where further input increases lead to reduced overall output. Optimal production is achieved before diminishing returns set in.

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13
Q

How do you solve for Marginal Product?

A

MP = Change in Total Product over the Change in Quantity of Labor

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14
Q

Interpretation - Increasing Returns:

A

Explanation: In the initial phase, as additional units of labor are employed, the marginal product (MP) increases.
Significance: Implies that each new worker contributes more to output than the previous one.

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15
Q

Interpretation - Decreasing Returns:

A

Explanation: After a point, the MP starts decreasing as additional units of labor are added.
Significance: Suggests that further increases in labor result in smaller output increments, indicating diminishing returns.

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16
Q

Average Product equation…

A

AP = Total Product over Quantity of Labor

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17
Q

Determining Shape by MP is by…

A

Explanation: The shape of the average product (AP) curve is influenced by the marginal product (MP).
Significance: Understanding how individual contributions of labor affect the overall average product.

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18
Q

If MP > AP…

A

Implication: AP rises.
Explanation: Each additional unit of labor contributes more to the total product, lifting the average.

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19
Q

If MP = AP…

A

Implication: AP is at its maximum.
Explanation: The point where the marginal product equals the average product results in the highest average.

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20
Q

If MP < AP…

A

Implication: AP falls.
Explanation: The additional labor’s contribution is not sufficient to maintain the previous average, leading to a decline in AP.

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21
Q

What is the principle of LDR (Law of Diminishing Returns)?

A

The Law of Diminishing Returns (LDR) states that as incremental inputs (like labor) are increased, there comes a point where the additional output gained per unit of input decreases.

Significance: This principle highlights the diminishing effectiveness of continuously adding more of a particular input.

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22
Q

What are the limitations on workers?

A

Explanation: The LDR imposes a limit on the number of workers a business will find beneficial to hire.
Significance: It helps businesses optimize their workforce, preventing unnecessary expenses and inefficiencies associated with excessive hiring beyond the optimal point.

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23
Q

What is the definition of fixed costs?

A

Fixed Costs are expenses that do not vary with the level of output or production.

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24
Q

What is the significance of fixed costs?

A

Significance: Regardless of production volume, these costs remain constant.

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24
Q

What are examples of fixed costs?

A

Examples: Rent, insurance, management salary.

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25
Q

What is the definition of variable costs?

A

Variable Costs are expenses that change in proportion to the level of output or production.

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26
Q

What are example of variable costs?

A

Material, fuel, power, transport services, most labor.

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27
Q

What is the significance of variable costs?

A

These costs fluctuate with changes in production volume

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28
Q

What is the formula for Total Costs?

A

TC=FC+VC

29
Q

What is total cost?

A

Total Costs consist of the sum of Fixed Costs and Variable Costs.

30
Q

What is the significance of total cost?

A

Understanding the overall financial commitment in relation to both fixed and variable elements.

31
Q

What is meant by “Control Over Variable Costs”

A

Variable Costs are easier to control as they respond directly to changes in output.

32
Q

What is the significance of “Control Over Variable Costs”

A

Businesses can manage and optimize these costs more actively.

33
Q

What is the Law of Diminishing Returns Impact on Variable Costs?

A

Increasing production initially leads to more output with the same variable costs. However, beyond a point, additional input increases lead to diminishing returns.

34
Q

What is the significance of the Law of Diminishing Returns Impact on Variable Costs?

A

Reflects the changing dynamics of variable costs with production volume changes.

35
Q

What is the equation for Average Fixed Costs?

A

Fixed costs over quantity.

36
Q

What is the concept of Average Fixed Costs?

A

As more is produced (increasing quantity of output), AFC falls. This is because the fixed costs are spread over a larger number of units, leading to a decrease in the average fixed cost per unit.

37
Q

What is the significance of Average Fixed Costs?

A

AFC helps understand the impact of fixed costs on each unit of production and how it changes with the level of output.

38
Q

What is the formula for Average Variable Costs?

A

Variable costs over quantity.

39
Q

What is the significance of Average Variable Costs?

A

AVC represents the average variable cost per unit of output. It is calculated by dividing the total variable costs (VC) by the quantity of output (Q).

40
Q

What is the concept of Average Variable Costs?

A

AVC decreases with increasing returns and increases with decreasing returns. This indicates the relationship between average variable costs and the level of output.

41
Q

What is the key insight of Average Variable Costs?

A

Increasing returns mean that producing more units leads to a decrease in AVC, while decreasing returns result in an increase in AVC.

42
Q

What is the formula of Average Total Costs?

A

Average Variable Costs + Average Fixed Costs

43
Q

Average Total Costs represents…

A

ATC represents the average total cost per unit of output. It is calculated by adding the average variable cost (AVC) to the average fixed cost (AFC).

44
Q

What is the concept of Average Total Costs?

A

ATC is always greater than AVC. This is because ATC includes both variable and fixed costs, making it the total cost per unit of output.

45
Q

What is the key insight of Average Total Costs?

A

ATC provides a comprehensive view of the overall cost structure, including both variable and fixed costs.

46
Q

What is the formula for Marginal Costs?

A

Change in Total Cost over the Change in Quantity

47
Q

Marginal Cost represents…

A

the change in total cost for producing one additional unit of output. It is calculated by dividing the change in total cost (ΔTC) by the change in quantity (ΔQ).

48
Q

What are the key relationships regarding Marginal Costs?

A

Crosses AVC and ATC at their minimum points.
- MC < AVC/ATC = AVC/ATC decreases, indicating efficient production.
- MC > AVC/ATC = AVC/ATC increases, signifying higher costs
- MC = AVC/ATC = AVC/ATC stays the same.

49
Q

What are the key insights of Marginal Costs?

A

Understanding MC is crucial for making production decisions and optimizing costs.

50
Q

What are the Characteristics of “Long-run Periods”?

A
  • Variable plant period.
  • Firms can adjust plants and capital.
51
Q

Long-run Periods are…

A

The long-run period refers to a timeframe in which firms have the flexibility to make adjustments to their production facilities and capital. Unlike the short-run, the long-run allows for changes in plant size and capital equipment.

52
Q

What are two important factors about Long-run Periods?

A
  • Long-run allows for variable plant periods.
  • Firms can adjust both plants and capital during the long-run period.
53
Q

What is the concept of Long-run Periods?

A

The long-run period provides a more extended time frame for businesses to make comprehensive adjustments to their production resources, allowing for greater flexibility and strategic planning.

54
Q

What are the key insights for Long-run Periods?

A

During the long-run, firms have the ability to adapt their production capabilities to achieve optimal efficiency and meet changing market demands.

55
Q

What are the characteristics of Economies of Scale?

A
  • Increasing returns to scale.
  • Average costs decrease with output increase.
  • Better specialization, bulk buying, etc.
56
Q

Economies of Scales refers to…

A

Economies of Scale refer to the cost advantages that a business can achieve by increasing its scale of production. As output increases, average costs per unit decrease, leading to more efficient operations.

57
Q

What are some key points for Economies of Scales?

A
  • Economies of Scale involve increasing returns to scale.
  • Average costs tend to decrease with an increase in output.
  • Better specialization and bulk buying contribute to the efficiency of larger-scale production.
58
Q

What is the concept of Economies of Scales?

A

Economies of Scale highlight the benefits of producing on a larger scale, leading to cost advantages and increased efficiency.

59
Q

What are the key insights for Economies of Scales?

A

As businesses expand their operations, they can take advantage of various factors such as better specialization and bulk buying, resulting in decreased average costs per unit.

60
Q

What are some characteristics of Constant Return to Scales?

A
  • Same output per additional input.
  • Average costs remain constant.
61
Q

Constant Return to Scales occur when…

A

the proportionate increase in inputs results in an equivalent increase in output. This leads to a consistent level of output per additional input, and average costs remain constant.

62
Q

What are some key points for Constant Return to Scales?

A
  • Constant Returns to Scale mean the same output per additional input.
  • Average costs remain constant as inputs and outputs scale proportionately.
63
Q

What is the concept of Constant Return to Scales?

A

Constant Returns to Scale indicate a linear relationship between input and output, resulting in a consistent level of efficiency and cost stability.

64
Q

What are some key insights for Constant Return to Scales?

A

In this scenario, the production process is scalable without impacting the average cost per unit of output.

65
Q

What are the characteristics of Diseconomies of Scale?

A
  • Decreasing returns to scale.
  • Average costs increase with output increase.
  • Issues like control and communication.
66
Q

Diseconomies of Scale refers to…

A

the situation where, as a firm expands its scale of production, the average costs per unit increase. This can be attributed to factors such as decreasing returns to scale and challenges in areas like control and communication.

67
Q

What are some key points for Diseconomies of Scale?

A
  • Diseconomies of Scale involve decreasing returns to scale.
  • Average costs tend to increase as output expands.
  • Issues like control and communication may arise in larger-scale operations.
68
Q

What is the Concept of Diseconomies of Scale?

A

Diseconomies of Scale highlight the challenges and inefficiencies that may arise as a business expands its production scale beyond a certain point.

69
Q

What are some key insights for Diseconomies of Scale?

A

As the scale increases, issues like decreasing returns to scale and difficulties in control and communication contribute to rising average costs.

AP Economics (4 decks)

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