Costs Flashcards
What are implicit and explicit costs?
Implicit costs - involve a direct money outlay.
Explicit costs - those that do not involve a direct money outlay.
What is opportunity cost?
The benefit that would have arisen had resources been used to make the next best alternative.
What is the difference between economic cost and accounting cost?
Economic cost - total of a firms explicit and implicit costs.
Accounting cost - total of a firm’s explicit costs.
What are sunk costs?
Sunk costs are those that are incurred no matter what decision an individual or firm makes, they are unavoidable and do not form part of opportunity cost.
What are non-sunk costs?
Non-sunk costs are those that are only incurred if a particular decision is made, and thus can be avoided if the decision is not made.
What is a cost-minimising firm?
A cost minimising firm is a firm that seeks to minimise it’s total costs for a given output.
What is the distinction between the short run and the long run?
The short run is the period of time when at least one of the firm’s input quantities is fixed.
The long run is the period of time when the quantities of all the firm’s inputs can change.
What is the isocost line?
The isocost line represents the set of combinations of labour and capital that yield the same total cost for the firm for given prices of labour and capital.
How does a change in the relative prices of inputs affect the isocost line?
A change in the relative price of inputs changes the slope of the isocost line.
How does a change in the relative prices of inputs affect the isocost line?
A change in the relative price of inputs changes the slope of the isocost line.
With diminishing MRTS:
1) An increase in w must decrease the cost minimising quantity of labour and increase the cost minimising quantity if capital.
2) An increase in r must decrease the cost minimising quantity of capital and increase the cost minimising quantity of labour.
Where can an interior solution be found on the isocost line?
For an interior solution, at the optimum, the slope of the isocost line equals the slope of the isoquant.
What is an extension path?
An extension path is a line that connects the cost minimising input combinations as the quantity of output, Q, varies, holding input prices constant.
What are normal and inferiror inputs?
For normal inputs the cost minimising quantity increases as the firm produces more output.
For inferior inputs, the cost minimising quantity decreases as the firm produces more output.
