lecture 5 Flashcards
What is the definition of opportunity cost?
The value of the next best alternative foregone when making a decision.
Opportunity costs can include both explicit and implicit costs.
What are explicit costs?
Costs that involve direct monetary payment for factors not owned by the firm.
Examples include wages, rent, and materials.
What are implicit costs?
Costs that represent the value of factors already owned by the firm.
Examples include the owner’s time and resources.
Which costs are considered irrelevant in decision-making?
- Historic costs
- Replacement costs
These costs do not impact future decision-making.
What is the total physical product (TPP)?
The total amount of output produced by a firm from given inputs.
What is the law of diminishing returns?
As more units of a variable input are added to fixed inputs, the additional output produced will eventually decrease.
What is the relationship between total physical product (TPP), average physical product (APP), and marginal physical product (MPP)?
TPP is the total output, APP is TPP divided by the number of inputs, and MPP is the change in TPP from adding one more unit of input.
What are fixed costs?
Costs that do not change with the level of output produced.
Examples include rent and salaries.
What are variable costs?
Costs that vary directly with the level of output produced.
Examples include raw materials and direct labor.
What is the formula for total cost (TC)?
TC = Total Fixed Cost (TFC) + Total Variable Cost (TVC).
What does marginal cost (MC) represent?
The additional cost incurred from producing one more unit of output.
What is average fixed cost (AFC)?
Total fixed costs divided by the quantity of output produced.
What is average variable cost (AVC)?
Total variable costs divided by the quantity of output produced.
What is average total cost (AC)?
Total costs divided by the quantity of output produced.
What is the definition of economies of scale?
Cost advantages that firms experience as they increase their level of production.
What are constant returns to scale?
A situation where increasing production does not change the average cost per unit.
What are diseconomies of scale?
Increased per-unit costs that occur when a firm grows beyond an optimal size.
What are external economies of scale?
Cost benefits that accrue to all firms in an industry as the industry grows.
What are external diseconomies of scale?
Increased costs that affect all firms in an industry as the industry grows.
Fill in the blank: The shape of the long-run average cost (LRAC) curve is typically _____.
[U-shaped]
What is the relationship between marginal cost and average cost?
When MC is less than AC, average cost decreases; when MC is greater than AC, average cost increases.
What is the significance of specialization and division of labor in economies of scale?
They lead to increased efficiency and productivity as tasks are divided among workers.
