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ECON 101 > ECON 101 Chp 10 - Output + cost > Flashcards

ECON 101 Chp 10 - Output + cost Flashcards

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1
Q

define firm

A

an institution that hires factors of production + organizes those factors to produce + sell goods + services

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2
Q

what’s the goal of a firm

A

to maximize profit

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3
Q

define depreciation

A

the fall in the value of a firm’s capital

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4
Q

define economic profit

A

total revenue - total cost (includes opportunity cost of production)

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5
Q

how is total cost measured in economic profit?

A

measured as the opportunity cost of production

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6
Q

define opportunity cost of production

A

the value of the best alternative use of the resources that a firm uses in production

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7
Q

what’s the sum of a firm’s opportunity cost of production

A

using resources…
1. bought in the market
2. Owned by the firm
3. supplied by the firm’s owner

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8
Q

what’s the opportunity cost of resources bought in the market

A

the amount spent on these resources is an opportunity cost of production because the firm could have bought different resources to produce some other good or service

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9
Q

what’s the opportunity cost of resources owned by the firm

A

opportunity cost of production because the firm could sell the capital that it owns and rent capital from another firm

when a firm uses it’s own capital it implicitly rents it from itself

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10
Q

define implicit rent rate of capital

A

the firm’s opportunity cost of using the capital it owns

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11
Q

what are the components in the implicit rate of capital

A
  1. economic depreciation
    2, forgone interest
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12
Q

define economic depreciation

A

fall in the market value of a firm’s capital over a given period

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13
Q

what’s the formula of economic depreciation

A

economic depreciation = market price of the capital at the beginning of the period - market price of the capital at the end of the period

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14
Q

define forgone interest

A

funds used to buy capital that could have been used for some other purpose and in their next best use, they would have earned interest

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15
Q

is forgone interest an opportunity cost of production?

A

yes

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16
Q

what resources are supplied by the firm’s owner

A
  1. entrepreneurship
  2. labour
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17
Q

define entrepreneurship

A

the factor of production that organizes a firm and makes its decisions

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18
Q

define normal profit

A

the profit that an entrepreneur earns on average

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19
Q

what’s the costs of normal profit?

A
  1. cost of entrepreneurship
  2. opportunity cost of production
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20
Q

define an owner’s labour services

A

the owner of a firm might supply labour but not take a wage

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21
Q

what’s the opportunity cost of owner’s labour

A

wage income forgone by not taking the best alternative job

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22
Q

what 5 decisions does a firm have to make to achieve maximum economic profit

A
  1. what to produce + in what quantities
  2. how to produce
  3. how to organize and compensate its managers + workers
  4. how to market and price its products
  5. what to produce itself and buy from others
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23
Q

what’s the biggest decision that an entrepreneur makes and what does this decision depend on?

A

what industry to establish a firm

depends on their background knowledge + interest, profit prospects

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24
Q

what are the 2 decision timeframes to study the relationship between a firm’s output decision and its costs

A
  1. the short run (decision)
  2. the long run (decision)
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25
Q

define the short run (decision)

A

a time frame in which the quantity of at least 1 factor of production is fixed

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26
Q

what are fixed factors of production called?

A

the firm’s plant

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27
Q

what are usually considered a firm’s fixed or variable factors of production

A

fixed: capital, land + entrepreneurship

variable: labour

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28
Q

how to increase a firm’s output in the short run

A

firm must increase the quantity of a variable factor of production (usually labour)

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29
Q

difference between short run + long-run decisions

A

short-run can easily be reversed, long-runs cannot

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30
Q

define the long-run (decision)

A

a timeframe in which the quantities of all factors of production can be varied - period in which the firm can change its plant

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31
Q

how can a firm increase output in the long-run

A

firm can change its plant + the quantity of labour it hires

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32
Q

what do we call the past expenditure on a place that has no resale value?

A

sunk cost

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33
Q

what costs influences a firms current decisions

A
  1. short-run cost of changing its labour inputs
  2. long-run cost of changing its plant
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34
Q

are sunk costs relevant to a firm’s current decisions?

A

no

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35
Q

what 3 related concepts describe the relationship between output + quantity of labour

A
  1. total product
  2. marginal product
  3. average product
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36
Q

define total product

A

maximum output that a given quantity of labour can produce

37
Q

define the marginal product of labour

A

the increase in total product that results from a 1-unit increase in the quantity of labour employed

38
Q

define the average product

A

tells us how productive workers are on average

39
Q

what’s the formula for the average product

A

average product = total product/quantity of labour employed

40
Q

define product curves

A

graphs of the relationships between employment and the 3 product concepts

show how total product, marginal product, and average product change as employment changes

41
Q

what are some characteristics of the total product curve?

A
  1. the curve becomes less steeper as employment increases
  2. separates the attainable output levels from those that are unattainable
  3. points that lie below the curve are attainable + inefficient
  4. points on the curve are attainable + technologically efficient
42
Q

how is the marginal product measured?

A

by the slope of the total product curve at a point

43
Q

what are the characteristics of a marginal product curve?

A
  1. reaches its peak quickly then slowly declines
44
Q

why are the shapes of the total product and marginal product curves similar across different firms + types of goods

A
  1. increasing marginal returns initially
  2. diminishing marginal return eventually
45
Q

define increasing marginal returns + what does it arise from?

A

when the marginal product of an additional worker exceeds the marginal product of the previous worker

arises from increased specialization + division of labour in the production process

46
Q

define diminishing marginal returns + what does it arise from?

A

diminishing marginal returns = when the marginal product of an additional is less than the marginal product of the previous worker

arises from adding more workers leads to less work for all workers to do –> less productive.

47
Q

define the law of diminishing returns

A

as a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes

48
Q

when is the average product largest

A

when average product = marginal product

49
Q

what’s the characteristic of the average product curve?

A
  1. curve increases at first than gradually decreases as more workers are added
50
Q

what 3 concepts explain the short run cost?

A
  1. total cost
  2. marginal cost
  3. average cost
51
Q

define a firm’s total cost

A

cost of all factors of production it uses

52
Q

how do we separate total cost?

A

total fixed cost and total variable cost

53
Q

define total fixed cost

A

cost of the firm’s fixed factors - stays constant at all outputs

54
Q

define total variable cost

A

cost of the firm’s variable factors - total variable cost changes as output changes

55
Q

what’s the formula of total cost?

A

TC = TFC + TVC

56
Q

describe the total cost, TFC, and TVC curves

A

total cost increases with more output
TVC increases with more output
TFC stays constant

57
Q

define marginal cost

A

the increase in total cost that results from a one-unit increase in output

58
Q

how to calculate marginal cost

A

increase in total cost/increase in output

59
Q

describe the marginal cost curve

A
  1. u-shaped - at small outputs, marginal cost decreases as output increases due to greater specialization + division of labour. As output increases further, marginal cost eventually increases due to law of diminishing returns
60
Q

marginal cost tells us how total cost _____ as output increases

A

changes

61
Q

what are the 3 average costs of production + define them

A
  1. average fixed cost - total fixed cost per unit of output
  2. average variable cost - total variable cost per unit of output
  3. average total cost - total cost per unit of output
62
Q

what’s the formula to get average fixed, variable and total cost from the total fixed, variable and total cost?

A

TC/Q = ATC
TFC/Q = AFC
TVC/Q = AVC

ATC = AFC + AVC

63
Q

describe the curves of the AFC, AVC, and ATC

A

AFC curve = gradually decreases with more output
ATC curve = u-shaped
AVC curve - U-shaped

vertical distance between AVC and ATC = AFC

64
Q

when does the marginal cost curve intersect with the average total cost curve at?

A

at their minimum points

65
Q

what’s the relationship between marginal cost and average cost/ATC/AVC

A

when marginal cost is less than average cost, the average cost is decreases

when the marginal cost exceeds average cost, average cost is increasing

66
Q

why is the ATC curve U-shaped?

A
  1. spreading total fixed cost over a larger output
    - when the firm increases its output, its total fixed costs is spread over a larger out, so AFC decreases + AFC curve slopes downwards
  2. diminishing returns - as output increases, AVC decrease initially then eventually increases

ATC slopes down then up from AVC increasing more quickly than AFC decreasing

67
Q

what’s the relationship between total product and total variable cost

A

variable cost is proportional to labour

curve has a positive slope that becomes less steep

68
Q

what’s the relationship between the average + marginal product and cost?

A

as output increases, MP + AP rise, while MC and AVC fall

at the maximum of marginal product, marginal cost is at it’s minimum, then with more output, MP lowers and MC rises while AP rises and AVC falls

at the maximum of average product, AVC is at it’s minimum, then as labourr increases further, out increases and AP diminishes and AVC increases.

69
Q

what are the factors that shift the short-run cost curves?

A
  1. technology
  2. prices of factors of production
70
Q

how does technology shift the short-run cost curves?

A

a technological change that increases productivity increases the marginal product + average product of labour

technological advances lowers the cost of product + shifts cost curves downward.

71
Q

how does the prices of factors of production affect the short-run cost curves?

A

generally, an increase in the price of a factor of production increases the firm’s cost and shifts the cost curves

increase in fixed costs, shifts the TFC and AFC curves upward and shifts the TC curve upward but leaves the AVC and TVC curves, and MC curve unchanged.

increase in variable cost shifts the TVC and AVC curves upward and shifts MC curve upward but leaves AFC and TFC curves unchanged.

72
Q

what happens to the firm’s costs in the long-run?

A

all the costs become variable

73
Q

what does the behaviour of long-run costs depend on?

A

the firm’s production function

74
Q

define the production function

A

the relationship between the maximum output attainable and the quantities of both labour and capital

75
Q

what occurs in a long-run cost?

A
  1. diminishing returns
  2. diminishing marginal product of capital
76
Q

define the marginal product of capital

A

the change in total product divided by the change in capital when the quantity of labour is constant

AKA the change in output resulting from a one-unit increases in the quantity of capital

77
Q

why does the minimum ATC for a larger plant occurs at a greater output than it does for a smaller plant?

A

larger plant has a higher total fixed, therefore at any given output, a higher AFC

78
Q

what’s the economically efficient plant for producing a given output?

A

the one that has the lowest average total cost.

79
Q

in the long-run, firms chooses the plant that ______ average total cost

A

minimizes

80
Q

when a firm is producing a given output at the least possible cost, it is operating on its _____

A

long-run average cost curve

81
Q

define the long-run average cost curve

A

the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and quantity of labour it employs

82
Q

what is a characteristic of the long-run average cost curve?

A

it’s a planning curve - tells the firm the plant and the quantity of labour to use at each output to minimize average cost

once the firm chooses a plant, the firm operates on the short-run cost curves that apply to that plant

83
Q

define economies of scale

A

features of a firm’s technology that make average total cost fall as output increases

LRAC curve slopes downwards

84
Q

what is the source of economies of scale

A
  1. greater specialization of labour + capital
85
Q

define diseconomies of scale

A

features or a firm’s technology that make average total cost rise as output increases

LRAC slope curves upwards

86
Q

define constant returns to scale

A

features of a firm’s technology that keep average total cost constant as output increases

LRAC curve is horizontal

87
Q

define a firm’s minimum efficient scale

A

the smallest output at which a long-run average cost reaches its lowest level

88
Q

what’s the role of minimum efficient scale in the market structure?

A

in a market where minimum efficient scale is small relative to market demand, the market has room for many firms and the market is too competitive

in a market where minimum efficient scale is large relative to market demand, only a small number of firms (maybe only 1 firm), can make a profit and the market is either an oligopoly or monopoly

ECON 101 (14 decks)

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