Intro - Chptr 9/Production & Cost Analysis: Short Run Flashcards
What is “production”?
Name given to that transformation of factors into goods and services.
What is a firm?
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.
What is a virtual firm?
A firm that ONLY organizes factors of production- it subcontracts out all production.
What are transaction costs?
Costs of undertaking trades through the market.
How does a firm relate to the market?
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.
What is command and control?
Rend or command over resources that organizers (firms) can appropriate to themselves by organizing production in a certain way.
What are “explicit costs”?
Wages paid to labor, rent paid to owners of capital, interest paid to lenders, and actual payments to other factors of production.
What is explicit revenue?
Total sales x price, e.g. 100 shoes x $20/pair = $2,000 (explicit revenue)
What are “implicit costs”?
The OC of time and capital (lost interest) provided by the owners of the firm.
What is “implicit revenue”?
The increase in the value of assets owned by the firm.
In economics,what is included in total costs?
Explicit payments to factors of production (explicit costs) and the OC of the factors provided by the owners of the firm (implicit costs).
In economics, what is total revenue?
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).
Formula for economic profit (π)?
π(E) = (Explicit Revenue + Implicit Revenue) - (Explicits Costs + Implicit Costs).
Formula for accounting profit?
π(A) = Explicit Revenue - Explicits Costs
What is a long-run decision?
A decision in which a firm can choose among all possible production techniques; all inputs are variable.
What is a short-run decision?
Decision in which a firm is constrained in regard to what production decisions it can make; at least one input is fixed.
What is a production table?
Table showing the output resulting from various combinations of factors of production or inputs.
What is “marginal” product?
Additional output forthcoming from an additional input, other inputs held constant.
What is “average” product?
Total output divided by the quantity of input.
What is a production function?
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.
What is the “law of diminishing marginal productivity”?
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.”
IMAGE PLACEHOLDER:
IMAGE: production table & function.
What are fixed costs? Formula?
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
What are variable costs? Formula?
Costs that change as output changes.
VC = Price(L) x Quantity(L), where L = Labor.
What is average total cost (ATC)?
ATC = TC / Quantity Produced
What is average fixed cost (AFC)?
AFC = FC / Quantity produced.
What is average variable cost (AVC)?
AVC = VC / Quantity Produced
What is marginal cost (MC)?
The increase/decrease in TC from increasing/decreasing the level of output by one unit: MC = TC / Δ Output
Describe the shape of short-run cost curves?
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.
What is the relationship between MP and AP?
If MP > AP, then AP is rising.
If MP < AP, then AP is falling.
What is the relationship between MP/AP and MC/AC? Why?
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.
What is the relationship between the MC curve and the ATC/AVC curves?
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.
How does AFC impact the relationship between AVC & ATC?
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.
