Costs Flashcards
Define accounting cost.
The direct cost of operating a business, including costs for raw materials
Define economic cost.
The sum of a producers accounting and opportunity costs
Define opportunity cost.
The value of what a producer gives up by using an input
Define economic profit.
A firm’s total revenue minus its economic cost
Define accounting profit.
A firm’s total revenue minus its accounting cost
Define fixed cost.
The cost of the firm’s fixed inputs, independent of the quantity of the firm’s output
Define variable cost.
The cost of inputs that vary with the quantity of the firm’s output
Define total cost.
The sum of a firm’s fixed and variable costs
What do fixed, variable and total costs look like on a graph?
Fixed cost is a straight line in the middle of the y axis, variable cost is a curve starting from the origin. And then total cost is a curve of the same shape but starting at the point where fixed cost intercepts the y axis.
Draw fixed cost, variable cost and total cost on a graph.
Picture
Does fixed cost or variable cost vary with output?
Variable
How can you tell what is fixed cost and what is variable cost from the total cost function?
Fixed cost is the constant and then variable cost makes up the other variables
What do we usually use instead of aggregated costs?
Average costs
Define average fixed cost.
The fixed cost per unit of output
Define average variable cost.
The variable cost per unit of output
How do we find the average costs?
Divide the relevant costs by the quantity produced
What does the average variable cost curve look like?
Straight line
What doe the average fixed curve look like?
Decreasing curve
What does the average total cost look like?
U shaped
Why is the average total cost curve U shaped?
Initially the decrease in ATC is greater than the increase in AVC, economics of scale, so the curve slopes downwards however when the increase in AVC is greater than the decrease in ATC, diseconomies of scale, the curve slopes upwards
What is marginal fixed cost equal to? And why?
0, fixed costs don’t increase as you increase the output
How do you find the function for marginal cost?
Differentiate the total cost function
How do you find the marginal cost at a particular output level?
Sub the value into function of marginal cost you have found
If MC < ATC what happens to ARC as output increases?
ATC decreases
If MC > ATC what happens to ARC as output increases?
ATC increases
What does ATC equal at its minimum?
MC
What is the relationship between MC and AVC the same as ?
The relationship between MC and ATC
Why is the MC upward sloping?
Need to look up answer
When looking at total cost why do we assume we are looking at the short run?
Because in the long run there is no such thing as a fixed cost every cost is variable
What is the relationship between short run ATC and long run ATC? And why?
Long run ATC can not be greater than the short run ATC, because in the long run you can use all inputs so you will never be worse off
Define sunk cost.
A cost that, one paid, the firm cannot recover
Why do we not look at sunk costs in our model?
They of not matter for economic decision making
Define economics of scale.
Total cost rises at a lower rate than output rises
Define diseconomies of scale.
Total cost rises at a faster rate than output rises
Define constant economics of scale.
Total cost rises at the same rate as output rises
Draw average total cost, average variable cost and average fixed cost on a graph.
Picture
