D Calc and Interp total, average, marginal, fixed, and variable costs Flashcards

1
Q

Total Cost

A

The sum of ‘all costs’ (Fixed, Variable, Explicit, Implicit) of producing a specific level of output.

Determine total cost before calculating MC

TC = TFC+TVC

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2
Q

Total Cost

A

The sum of ‘all costs’ (Fixed, Variable, Explicit, Implicit) of producing a specific level of output.

Determine total cost before calculating MC

TC = TFC+TVC

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3
Q

Total Fixed Cost

A

The cost of inputs that do not vary w/ the quantity of output

Ex’s: PPE, Normal Profit, fixed int. costs on debt financing, wages of management and finance employees who are not directly involved in the production of the firms product

AKA ‘Quasi-fixed’ costs because they MUST BE PAID even when Demand declines, so they result in significant losses during recession or aggressive economic competition.

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4
Q

Total Variable Cost

A

The cost of all inputs that vary with output over the period of analysis.

Ex: Largest VC’s; Wages, Raw materials

VC’s move with production; output; demand

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5
Q

Which relationship explains the relationship between output and cost?

A

The relationship between output and cost can be explained via

Total Cost

Marginal Cost

Average Cost

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6
Q

Average Fixed Cost

A

AFC = Total Fixed Costs / Total Product

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7
Q

Marginal Cost

A

%chng TC / %chng Q;output;production

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8
Q

Average Variable Costs

A

AVC = TVC / Total Product

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9
Q

TC and TVC exhibit first decreasing, then increasing marginal cost per unit

A

MC first decreases (as MP of a factor input increases) and then MC increases (after we reach the point of DMP)

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10
Q

Important relationships among MC and AVC

A

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

ATC and AVC are U-shaped, though AFC is simply concave, it’s pulled upward in ATC, where costs decrease through increase in output until DMR is realized

Min points on ATC; lowest cost per unit; max profit per UNIT, but NOT PROFIT MAX POINT

MC curve above AVC; firms short-run supply in perfectly competitive market

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11
Q

Total Variable Cost

A

The cost of all inputs that vary with output over the period of analysis.

Ex: Largest VC’s; Wages, Raw materials

VC’s move with production; output; demand

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12
Q

Which relationship explains the relationship between output and cost?

A

The relationship between output and cost can be explained via

Total Cost

Marginal Cost

Average Cost

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13
Q

Average Fixed Cost

A

AFC = Total Fixed Costs / Total Product

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14
Q

Marginal Cost

A

%chng TC / %chng Q;output;production

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15
Q

Average Total Costs

A

ATC = TC / Total Product

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16
Q

Average Variable Costs

A

AVC = TVC / Total Product

17
Q

TC and TVC exhibit first decreasing, then increasing marginal cost per unit

A

MC first decreases (as MP of a factor input increases) and then MC increases (after we reach the point of DMP)

18
Q

Important relationships among MC and AVC

A

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

19
Q

Important relationships among MC and AVC

A

AFC slopes downward;fixed costs are constant over Q

Vertical distance between ATC and AVC = AFC

MC declines initially, then increases; low output Q’s; efficiencies are realized; from specialization of labor. However, at some point DMR increases

MC intersects AVC and ATC at their minimum points (from below; ATC or AVC are decreasing; when MC exceeds ATC or AVC, ATC and AVC are increasing

MC curve is ‘J’ shaped;declining MC over lower production Q’s and because min. points of the ATC and AVC curves are not the same.

20
Q

The relationship between product curves and cost curves illustrates an important link between a firms product curves (technology) and cost curves (production)

A

0 —> L1, MP and AP increase and AP reached max at L1, and 0—> Q1, MC and AVC decrease and MC is reached at Q1

L1—L2;labor increases;Output increases

MP decreases, AP increases to max L2. MC increases to meet AVC that decreases to Q2 where it begins to rise.

L2 and Q2 beyond: AP declines, MP declines; MC increases, AVC increases

21
Q

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?** (REMEMBER COSTS ARE AVG. FIXED, AVG VAR, MARGINAL)

A

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?

A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost.