Costs Of Production Flashcards
What is economic costs
Cost exists because of scarcity of resources
When society uses resources to produce products it forgoes all alternative opportunities to use those resource for other purposes
What are explicit costs
Monetary payments it makes to those who supply labour services, materials, transport
What are implicit costs
Opportunity costs of using self owned, self employed resources. To the firm implicit costs are the money pavements that self employed resources could have earned in their best alternative use
What is accounting profit
Total revenue - explicit costs
What is normal profit
Payment made by a firm to obtain and retain entrepreneurial ability or the minimum income entrepreneurs must receive to induce it to perform those functions for a firm
What is economic profit
Total revenue - total costs (implicit and explicit)
Explain the short run of firms
It’s too short to alter its plant but long enough to permit change in degree to which the fixed plant is used
Explain long run of firms
Firm can adjust quantities of all resources that it employs including plant capacity
What are the short run production relationships
Total product (TP)
Total quantity or total output of a particular good or service produce
Marginal products (MP)
Extra output or added product associated with adding a unit of a variable resource to the production process
MP = average TP/ average Input
Average product (AP)
Output per unit of input
AP = TP/input
What are fixed costs
Costs that do not change based on output
Associated with firms existence
What are variable costs
Costs that change with level of output
Associated with payments of inputs
What is the law of diminishing returns
As successive units of a variable resource are added to a fixed resource beyond some point the extra or marginal, product that can be attributed to to each additional unit of the variable resource decline
What are total costs
Sum of fixed costs and variable costs at each level of output
What are the average fixed costs
Total cost divided by each level of output
What are average variable cost
Total variable cost divided by leaves of output
What is the average total cost
Total cost divided by level of output
What are marginal costs
Cost of producing one unit of output
Change in total cost/change in quantity
Explain long run production costs
Firms and industries can make resource adjustments
Firms can enter and exit industries
Analysis only in ATC
How to firm size and cost change over the long run
Manufacturers might start on a small scale and expand to become larger sizes
Larger plants will lower ATC but eventually a still larger plant may cause ATC to rise
What is returns to scale
LR relationship between inputs and outputs
All inputs change by a certain percentage
What are the different returns to scale
Constant returns to scale : % increase in inputs will give rise to same % increase in output
Decreasing returns to scale : % increase in inputs gives rise to a smaller % increase in output
Increasing returns to scale : % increase in inputs will give rise to a larger % increase in output
What does economies of scales explain?
They explain the downward sloping part of long run ATC as plant increases a number of factors will for a time lead to lower average costs of production
Such as labour specialisation
Managerial specialisation
Efficient capital
What does diseconomies of scale explain
The upsloping part of long run ATC, as plants keeps increasing average costs of production will increase
There is a difficulty of efficiently controlling and coordinating a firms operations as it becomes a large scale producer
What is minimum efficient scale and industry structure
MES is the lowest level of output at which a minimise long run average costs .
If this happens at relatively high levels of output efficient production will be achieve with a few large scale producers
Small firms cannot realise MES and will not be able to compete
Economies of scale might extend beyond the markets size
Natural monopoly a relatively rare market situation in which ATC is minimised when only one firm produces the good or service
