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economics > Costs of Production > Flashcards

Costs of Production Flashcards

chapter 7

1
Q

in what time periods can a firm operate?

A

short run or long run

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2
Q

what is the long run?

A

a period of time during which all the factors of production are variable in quantity

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3
Q

what is the short run?

A

a period of time during which at least one factor of production is fixed in supply

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4
Q

what are explicit costs?

A

costs incurred by a firm when it pays an amount of money for something

e.g. when a firm pays its electricity bill

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5
Q

what are implicit costs?

A

the do not involve the paying out of money but should still be considered in our analysis.

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6
Q

what is the opportunity cost?

A

the cost of foregone alternatives.

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7
Q

what are fixed costs?

A

costs that don’t change as output changes

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8
Q

what are variable costs?

A

costs that vary as output changes.

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9
Q

what is the total cost?

A

both fixed and variable cost added together.

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10
Q

what is a company´s shut down point in the short run?

A

In the short run the company may make a loss.
The maxim for a companies in the short run is to cover their variable costs and contribute to the reduction of their fixed costs.

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11
Q

The Law of Diminishing Marginal Returns.

A

As more and more of a variable factor is added to a fixed factor, at some stage the increase in output by the last unit of the variable factor will begin to decline.

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12
Q

what is the Average Cost and how is it calculated?

A

the costs per unit…
calculated by dividing total costs by quantity

includes normal profit

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13
Q

what is normal profit?

A

the return that sufficiently rewards the risk-taking of an entrepreneur and it must be earned to stay in business.

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14
Q

what are the marginal costs?

A

the costs of producing an extra unit of a good. It is arrived at by calculating the change in total costs.

if MC is rising, we can say that the AC is rising too.

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15
Q

why slopes the SAC curve first downwards?

A

specialization of labour,

greater spread of fixed costs

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16
Q

why slopes the SAC curve upwards?

A

LOMR

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17
Q

what shape has the SAC curve?

A

an U-Shape

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18
Q

What are Economies of Scale ?

A

savings due size

- can be international and external

19
Q

what are internal economics of scale?

A

forces within a firm that cause the average/ unit cost of that firm to decline as it grows in size.

20
Q

examples of internal economies of scale:

A 
increased use of machinery,
specialization/devision of labour,
construction savings,
purchasing economies,
financial economies,
21
Q

what are external economies of scale?

A

forces outside a firm that cause the average/ unit cost of that firm to decline as the industry grows in size

22
Q

examples of external economies of scale:

A 
better infrastructure,
development of research,
trades,
availability of training curses,
support from public bodies,
23
Q

what are diseconomies of scale?

A

disadvantages due to size

- can be internal and external

24
Q

what are internat diseconomies of scale?

A

forces within a firm that cause the average/ unit cost of that firm to increase as it grows in size.

25
Q

examples of internal diseconomies of scale:

A

poor decision-making,
fall in staff moral,
communication problems,
control problems,…

26
Q

what are external economies of scale?

A

forces outside a firm that cause the average/ unit cost of that firm to increase as the industry grows in size.

27
Q

examples of external economies of scale:

A

shortages of factors of production,
raw material shortage,
infrastructural problems,…

28
Q

what effect do returns to scale have to costs?

A

increasing = doubling inputs with outputs more than outputs, LRAC decreases

decreasing= doubling inputs with output less than doubling , LRAC decreases

constant= changing at exactly the same rate as factors , LRAC is horizontal

29
Q

why do small firms survive in the Irish market even though they don’t benefit from economies of scale?

A 
small size of the market,
consumer loyalty,
personal services,
traditional markets,
nature of the good,
membership of voluntary groups
30
Q

what are the benefits of small-scale enterprises?

A 
quick response time,
decision-making,
high output per person,
fewer HR problems,
lower overheads
31
Q

what are social costs?

A

a cost to society of an action or output

cost/price that society has to pay for the existence of a particular product

price that society has to pay as a result of the production/consumption of a community

EXAMPLES: traffic congestion, air/water pollution, global warming,…

32
Q

what is a social benefit?

A

the benefit/advantage that accrues to society as a whole as a result of an individual firm consuming/producing a commodity that is not measured by the price system

33
Q

what is the private cost of a good/service?

A

the cost to the firm of making the good or providing the service

34
Q

define external diseconomies of consumption!

A

they occur when an action is taken by a consumer and this imposes a cost on third parties for which they are not compensated

e.g. a drummer practices in a loud fashion and disturbes the neighbors

35
Q

define external diseconomies of production !

A

they occur when a producer carries out an activity and imposes a cost on third parties for which they are not compensated

e.g. a manufacturing plant causing air or noise pollution

36
Q

define external economies of consumption !

A

they occur when a consumer undertakes an action and it benefits third parties for which the consumer is not compensated

e.g. a person volunteers the management skills they learned at work to co-ordinate a local youth club

37
Q

define external economies of production !

A

happens when actions taken by producers result in benefits to third parties for which the producer is not compensated

e.g. a company training staff who later leave and work for other firms

38
Q

define REVENUE !

A

revenue is the money received from sales, and as sales increase so does total revenue

39
Q

what is the AR?

A

average revenue.

calculated by dividing total revenue by quantity, also known as the price of a good. the ar curve is the demand curve

40
Q

what is MR ?

A

marginal revenue.

the change in total revenue when an extra unit of output is sold

41
Q

how are profits calculated?

A

a firm will make a profit if its total revenue exceeds its total cost (includes normal profit)

i.e.the return that sufficiently rewards the risk taken by the entrepreneur/ the minimum that must be earned to stay in business

42
Q

at what point should a profit-maximising company produce?

A

MC = MR

Mc cuts Mr from below, Mc is rising at a faster rate than Mr

AR must be at least equal to AC

43
Q

difference between profit-maximising firms in the short and in the long run?

A

short run: AVC must be covered

long run: AC must be covered

economics (28 decks)

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