Lesson 12 Costs of Production Flashcards

1
Q

Industrial organization

A

study of how firms’ decisions about price/quantities depend on market conditions

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2
Q

Goal of firms

A

1) maximize profit

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3
Q

Profit

A

1) Total revenue - Total cost

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4
Q

Types of costs

A

1) explicit - paying worker wages or price for ingredients
2) implicit - do not require cash outlay (instead of baking cookies Chloe could earn 100 an hour being a programmer)

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5
Q

Cost of Capital is a ____ cost

A

1) opportunity
2) instead of spending $300K to buy factory –> could’ve put it in savings account at 5% interest, or 15K a year –> Opportunity cost is 15K

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6
Q

Economic profit vs accounting profit

A

1) economic profit –> Total rev - implicit costs - explicit costs
2) accounting profit –> total rev - explicit costs

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7
Q

Why is economic profit important

A

1) Firm with positive economic profit –> stays in business (has enough to cover all its opp. costs + has revenue leftover to give owners)
2) Firm with economic losses –> will eventually go out of business

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8
Q

Marginal product

A

1) change in quantity of output from one additional unit of input
2) ex: when # workers go from 1 to 2, cookie production goes from 50 to 90 SO marginal product is 40 cookies

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9
Q

What happens to marginal product as # workers increase

A

1) marginal product declines
2) DIMINISHING MARGINAL PRODUCT –> as more workers hired, they have to share more kitchen equipment –> each one contributes less to overall production

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10
Q

Total Cost Curve

A

1) relationship btwn quantity produced (x) + total cost (y)
2) exponential (concave up, increasing)

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11
Q

Production function curve

A

1) relationship btwn workers hired (x) + quantity output (y)
2) flattens out (concave down, increasing)

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12
Q

Diminishing marginal product explains why, as output increases

A

the production function gets flatter, and the total-cost curve gets steeper

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13
Q

Farmer Greene faces diminishing marginal product. If she plants no seeds on her farm, she gets no harvest. If she plants 1 bag of seeds, she gets 3 bushels of wheat. If she plants 2 bags, she gets 5 bushels. If she plants 3 bags, she gets

A

6 bushells

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14
Q

Fixed vs variable costs

A

1) Fixed cost = do not vary with quantity of output produced
2) example = rent, bookkeeper’s salary
3) Variable cost = changes with quantity of output produced
4) cost of coffee beans, milk, sugar (inputs for product)

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15
Q

Average cost

A

1) total cost divided by quantity of output
2) Subdivide into average fixed and average variable cost

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16
Q

Marginal cost

A

1) amount total cost rises when firm increases production by one unit
2) change TC / change Q

17
Q

Graph Analysis

A

1) Rising marginal cost –> upward slope of MC –> diminishing marginal product
2) U shaped average total cost –> U shaped since at first ATC falls bc fixed cost is spread over greater output BUT then variable cost increases with more production
*vertex/bottom of U shaped total cost –> represents most efficient point where minimize total cost

18
Q

Relationship btwn marginal cost + average total cost

A

1) When MC less than ATC –> ATC falling
2) When MC greater ATC –> ATC rising
3) MC curve crosses ATC at minimum

19
Q

A firm is producing 20 units with an average total cost of $25 and a marginal cost of $15. If it increases production to 21 units, which of the following must occur?

A

ATC decreases

20
Q

The government imposes a $1,000 per year license fee on all pizza restaurants. As a result, which cost curves shift?

A

average total cost and average fixed cost

21
Q

Relationship btwn short run (SR) + long run curves (LR)

A

1) LR ATC much flatter U shape than SR
2) SR curves on or above LR –> over LR firms have more flexibility

22
Q

Why do firms have more flexibility in long run

A

1) in SR –> no choice but to hire more workers –> diminishing marginal product
2) in LR –> can build more factories

23
Q

Economics of scale vs diseconomies of scale vs constant returns to scale

A

1) Economies of scale = when LR ATC declines as output increases
2) Diseconomies of scale = when LR ATC rises as output increases
3) Constant returns to scale = LR ATC doesn’t vary with output

24
Q

What causes economies/diseconomies of scale

A

1) Economy of scale –> higher production levels –> more specialization amongst workers –> better at specific tasks
2) Diseconomies of scale –> coordination problems arise –> more production could stretch management team

25
Q

If a higher level of production allows workers to specialize in particular tasks, a firm will likely exhibit _______ of scale ______ average total cost.

A

economies; falling

26
Q

If Boeing produces 9 jets per month, its long-run total cost is $9 million per month. If it produces 10 jets per month, its long-run total cost is $11 million per month. Boeing exhibits

A

diseconomies of scale.