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
Average Variable costs (AVC)
total variable costs divided by the number of units produced
AVC = TVC / Q
Total Costs (TC)
Total Fixed Costs (TFC) and Total Variable Costs (TVC)
TC = TFC + TVC
Average total costs (ATC)
- total cost divided by the number of units produced
ATC = TC / Q
Or
ATC = AFC + AVC
The ATC curve is U-shaped because Average Total costs will be high for both an under-untitlised plant (AFC is high) and an over-utilized plant (MC IS high)
Marginal Costs (MC)
the change in total costs required to produce an additional unit of output
To increase profits - one only produces if the additional revenue from one more unit is greater than the marginal costs of that unit
law of diminishing returns
as more and more units of a variable resource are applied to a fixed amount of other resources, output will eventually increase by smaller and smaller amounts
total product
the total output of a good at a given rate of input
average product
the total product divided by the number of variable units (labor) used to get that total product
AP = TP / Q
marginal product
-the change in total product associated with each additional unit of labor
Average product increases as long as marginal product is greater than the average product
the cost curves
Remember that ATC is U-shaped
Remember that AFC falls with output
AVC is small part of ATC when output is small and a large part of ATC when output is large
MC curve may decrease as first, but then rises due to the law of diminishing marginal returns
MC < AVC (ATC) -> AVC(ATC) decreases
MC > AVC(ATC) -> AVC(ATC) increases
