Firm Costs Flashcards
What is the objective of a firm and what does that objective look like?
The objective of a firm is to maximize their profit.
Firm’s Profit: Total Revenue - Total Cost
If a firm makes one Product TR = PQ
What are the true profits of a firm?
The true profits of a firm are True Economic profit = TR - Total Cost
And in this Total Cost includes Explicit Cost & Implicit Cost
Whereas accounting profit = TR - Explicit Cost
What are the production models for firms?
Firms produce goods by taking inputs and transforming them into goods they sell called inputs.
What is the amount of output produced dependent on?
The quantity of inputs available and characteristics of production technology.
What are the types of Inputs?
Fixed Inputs: can’t be adjusted quickly Variable: Can be adjusted at any time Labour Raw materials Capital (Financial assets & physical capital)
What is an assumption we make about the short run?
That capital is fixed in the short run
What is the total product curve?
It is the relationship between Qoutput & Qinput showing how the Qoutput depends on the Quantity of a variable input with everything else held constant
What is the Marginal Product of Labour?
It is the additional Qoutput produced from an additional unit of labour.
🔺Qoutput
—
Describe the concept of the diminishing returns to an input
It is the concept that the more a firm produces, the lower the additional quantity of an output by the additional quantity of an input used.
What is the relationship between the Total Product curve and the marginal product labour?
Not ironclad but essentially Marginal Product labour is the slope/rate of change of the Total Product curve
What is the relationship between the amount of capital, TP & MpL?
The relationship is that if capital increases TP & MpL increase as well
What are the costs of production?
The costs of production are divided into fixed costs and variable costs.
What are fixed costs?
Costs that do not depend on output: The Cost of the fixed inputs and these are essentially like sunk costs.
What are variable costs?
They are costs that depend on output: the cost of the least amount of the variable inputs needed to make the amount of output.
What is the Total Cost and the Total Cost curve?
The total cost curve is the relationship between Total Cost and the quantity produced.
TC = TFC + TVC
What is the relationship between Marginal Cost and Average Total Cost?
If MC < ATC, ATC is decreasing
If MC > ATC, ATC is increasing
Meaning that for short run production
-the marginal product curve is diminishing
-MC is increasing
-for large fixed costs ATC> MC when the Quantity is low
-Therefor this implies a u shaped ATC curve
What is a firm’s marginal cost?
A firm’s MC is the change in Total Cost of one additional unit
🔺TC
MC= —
What is a firm’s average total cost?
It is the Total Cost divides the Total Quantity by the Total Quantity.
TC
ATC=—
What is a firm’s variable cost?
It is the total variable cost per unit of output.
TVC
AVC = —
What is a firm’s average fixed cost?
It is the total fixed cost per unit of output.
TFC
TFC=—
How do firms maximize profit in the short run?
They have to produce until MC= P.
How do firms maximize profits in the kind run?
They maximize profits by choosing the most cost minimizing combination of all inputs because in the long run, all inputs are variable and therefore no fixed costs.
How do firms in the long run choose Cost minimizing inputs?
Firms in the long run choose the fixed inputs that minimize the short run average cost at a particular output.
What is the shape of the long run average total cost curve determined by?
It is determined by the scales of production
