Intro - Chptr 9/Production & Cost Analysis: Short Run

Question 1

What is “production”?

Answer 1

Name given to that transformation of factors into goods and services.

Question 2

What is a firm?

Answer 2

Economic institution that transforms factors of production into goods and services: (1) organizes factors of production and/or (2) produces goods and/or (3) sells produced goods to individuals, businesses, or government.

Question 3

What is a virtual firm?

Answer 3

A firm that ONLY organizes factors of production- it subcontracts out all production.

Question 4

What are transaction costs?

Answer 4

Costs of undertaking trades through the market.

Question 5

How does a firm relate to the market?

Answer 5

It operates within a market, but, simultaneously, it is a negation of the market in the sense that it replaces the market with command and control.

Question 6

What is command and control?

Answer 6

Rend or command over resources that organizers (firms) can appropriate to themselves by organizing production in a certain way.

Question 7

What are “explicit costs”?

Answer 7

Wages paid to labor, rent paid to owners of capital, interest paid to lenders, and actual payments to other factors of production.

Question 8

What is explicit revenue?

Answer 8

Total sales x price, e.g. 100 shoes x $20/pair = $2,000 (explicit revenue)

Question 9

What are “implicit costs”?

Answer 9

The OC of time and capital (lost interest) provided by the owners of the firm.

Question 10

What is “implicit revenue”?

Answer 10

The increase in the value of assets owned by the firm.

Question 11

In economics,what is included in total costs?

Answer 11

Explicit payments to factors of production (explicit costs) and the OC of the factors provided by the owners of the firm (implicit costs).

Question 12

In economics, what is total revenue?

Answer 12

The amount the firm receives for selling its products/services (explicit revenue) and any increase in the value of the assets owned by the firm (implicit revenue).

Question 13

Formula for economic profit (π)?

Answer 13

π(E) = (Explicit Revenue + Implicit Revenue) - (Explicits Costs + Implicit Costs).

Question 14

Formula for accounting profit?

Answer 14

π(A) = Explicit Revenue - Explicits Costs

Question 15

What is a long-run decision?

Answer 15

A decision in which a firm can choose among all possible production techniques; all inputs are variable.

Question 16

What is a short-run decision?

Answer 16

Decision in which a firm is constrained in regard to what production decisions it can make; at least one input is fixed.

Question 17

What is a production table?

Answer 17

Table showing the output resulting from various combinations of factors of production or inputs.

Question 18

What is “marginal” product?

Answer 18

Additional output forthcoming from an additional input, other inputs held constant.

Question 19

What is “average” product?

Answer 19

Total output divided by the quantity of input.

Question 20

What is a production function?

Answer 20

Relationship between the inputs (factors of production) and outputs. It tells us the maximum number of outputs that can be derived from a given number of inputs.

Question 21

What is the “law of diminishing marginal productivity”?

Answer 21

As more and more of a variable input is added to an existing fixed input, after some point the additional output one gets from the additional input will fall. Also known as the “flower pot law.”

Question 22

IMAGE PLACEHOLDER:

Answer 22

IMAGE: production table & function.

Question 23

What are fixed costs? Formula?

Answer 23

Costs that are spent and that cannot be changed in the period of time under consideration. FC = Price(k) x Quantity(k), where k = capital. FC = AFC * Q

Question 24

What are variable costs? Formula?

Answer 24

Costs that change as output changes.

VC = Price(L) x Quantity(L), where L = Labor.

Question 25

What is average total cost (ATC)?

Answer 25

ATC = TC / Quantity Produced

Question 26

What is average fixed cost (AFC)?

Answer 26

AFC = FC / Quantity produced.

Question 27

What is average variable cost (AVC)?

Answer 27

AVC = VC / Quantity Produced

Question 28

What is marginal cost (MC)?

Answer 28

The increase/decrease in TC from increasing/decreasing the level of output by one unit: MC = TC / Δ Output

Question 29

Describe the shape of short-run cost curves?

Answer 29

The MC curve goes through the minimum points of the ATC and AVC curves; each of these curves is U-shaped. Minimum of the ATC is to the right of the minimum of the AFC. AFC slopes down continuously. IMAGE: 9-2.

Question 30

What is the relationship between MP and AP?

Answer 30

If MP > AP, then AP is rising.

If MP < AP, then AP is falling.

Question 31

What is the relationship between MP/AP and MC/AC? Why?

Answer 31

They are mirror images because as more & more of a variable input is added to a fixed input, law of diminishing productivity causes MP & AP to fall and as these fall MC & AC rise.

IMAGE: 9-3.

Question 32

What is the relationship between the MC curve and the ATC/AVC curves?

Answer 32

If MC > ATC, then ATC is rising.
If MC < ATC, then ATC is falling.
If MC = ATC, then ATC is at its minimum.
If MC > AVC, then AVC is rising.
If MC < AVC, then AVC is falling.
If MC = AVC, then AVC is at its minimum.

Question 33

How does AFC impact the relationship between AVC & ATC?

Answer 33

As output increases, AFC is spread out more and so decreases. The space between AVC and ATC represents AFC so as output increases, the space between AVC and ATC decreases.