Econ Ch 8 Flashcards
residual claimants
individuals who personally receive the excess of revenues over costs
They have the incentive to increase revenues or reduce costs
two ways to organize productive activity
Contracting- using outside producer for specific tasks
-Pests and technology
Team production - where employees work together under the supervision of the owner (or owner’s representative)
-Loading and unloading
shirking
want to reduce
working less than the expected rate of productivity, which reduces output
principal-agent problem
the incentive problem that occurs when the purchaser of services lacks full information about the circumstance faced by the seller, and therefore, cannot know how well the seller performs the service
Hire someone to do because you expect them to know it, but that leads to the problem that you do not know if they did it right, you do not know the difference
As a manager, need to reduce this problem, algin employee/agent incentives and owner/supervisor/principal incentives
explicit costs
the payments a firm makes to purchase the goods and services of productive resources
for raw materials, employees, rent, materials
implicit costs
the opportunity cost associated with the firm’s use of resources that it owns
Ex, foregone interest, foregone rent, foreign wages
total costs
the costs (both explicit and implicit) of all the resources used by the firm
accounting profit
the sales revenue minus the expenses of the firm (does not usually include implicit costs)
Accounting profit = total revenue - explicit costs
economic profit
the difference between the firm’s total revenue and its total costs (including both explicit and implicit costs)
Economic profit = total revenue - (explicit costs + implicit costs)
normal profit rate
zero economic profit, the competitive rate of return on the capital and labor of the owners, we expect them to
Zero economic profit does not mean the business is failing
short run
a time period so short that a firm is unable to vary some of its factors of production
long run
a time period long enough to allow the firm to vary all of its factors of production
Total fixed costs (TFC)
the sum of the costs that do not vary with output
Will remain unchanged as output rises or falls in the short run
Insurance premiums, property taxes, etc
Average Fixed Cost (AFC)
total fixed costs divided by the number of units produced
AFC = TFC / Q
Always declines as output rises
Total variable costs (TVC)
the sum of those costs that change with output
wages and raw materials
