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EC 260 > Lesson 1.4 > Flashcards

Lesson 1.4 Flashcards

1
Q

explain opportunity cost

A

revenue a manager could have received if she had used her resources to produce the next best alternative product or service. That is, opportunity costs are the revenues forgone if resources (inputs) are not optimally used

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2
Q

do you minimize/maximize opportunity cost by using resources as efficiently as possible?

A

minimize

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3
Q

explain economic cost

A

cost of a product is equal to sum of production costs (explicit costs) and opportunity costs (implicit costs)

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4
Q

opportunity cost doctrine

A

the inputs’ values (when used in their most productive way) together with production costs (the accounting costs of producing a product) determine the economic cost of production

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5
Q

define explicit cost

A

ordinary items accountants include as firm expenses

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6
Q

define historical cost

A

money that managers actually paid for an input

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7
Q

explain sunk cost

A

resources that have already been spent and cannot be recovered

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8
Q

what should managers do with sunk costs?

A

ignore them when making decisions about future actions, they are irrelevant to financial decisions

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9
Q

what do cost functions show?

A

relationship between input costs and output

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10
Q

how is cost structure of a firm determined?

A

production function and the input prices it faces

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11
Q

what can cost functions and production functions be?

A

short run and long run

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12
Q

define short run

A

period of time between the situation in which the quantity of no input is variable and the situation where all quantities of inputs are variable; where quantity of at least 1 input is fixed

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13
Q

what is a more restrictive definition of short run

A

time interval so brief that managers cannot change the quantities of plant or equipment employed in production

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14
Q

what are fixed inputs?

A

inputs that cannot be changed in short run

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15
Q

what do fixed inputs determine?

A

the scale (size) of the plant

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16
Q

what is total fixed cost

A

cost per period of time spent on fixed inputs

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17
Q

what kind of value is TFC

A

constant, does not vary with level of output produced

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18
Q

explain total variable cost

A

cost spent on variable inputs

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19
Q

what happens to TVC as output increases?

A

increases since greater output requires more inputs

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20
Q

what rule does total variable cost follow?

A

law of diminishing marginal returns

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21
Q

what is total cost TC?

A

TFC + TVC

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22
Q

what do cost functions predict?

A

how costs change with the level of output

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23
Q

formula for ATC

A

AFC + AVC

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24
Q

x axis and y axis graph of MC, AVC, AFC, ATC

A

y axis is cost per unit of output, x axis is unit of output

25
Q

explain graph of MC

A

decreases for a little and then increases (checkmark)

26
Q

explain graph of ATC

A

higher than AVC and ATC, U shape with only slight increase, minimum where ATC = MC

27
Q

explain graph of AFC

A

decreases in an increasing way; passes through the intersection of AVC and
MC

28
Q

explain graph of AVC

A

U shape, starts in middle of MC and AFC curve; minimum where AVC = AFC = MC; hits minimum before ATC; inverse of AP curve

29
Q

formula for AVC

A

TVC / Q = (PX)/Q = P(1/AP)

30
Q

what is MC

A

incremental cost of producing one more unit of output

31
Q

formula for MC for continuous units

A

dTC/dQ = dTVC / dQ = P(dX/dQ) = P(1/MP) (forgone)

32
Q

formula for MC for discrete units (whole numbers only)

A

change in TC / change in Q = change in TVC / change in Q

33
Q

final formula for MC between Q and Q - 1

A

where C(Q) is the total cost of producing Q units of output, it is C(Q) - C(Q-1)

34
Q

what does long run average cost function LAC show

A

minimum cost per unit of output for any size of plant

35
Q

how is LAC related to short run cost functions?

A

for each level of output, the point on the lowest short run cost function for that level of output will also lie on the LAC curve

36
Q

what is LRTC

A

long run total cost function: shows the relationship between long run total cost and output

37
Q

formula for LRTC

A

Q*L(Q)

38
Q

LAC formula

A

L(Q)

39
Q

explain long run marginal cost function

A

function representing how varying output affects the cost of producing the last unit if the manager has chosen the most efficient input bundle

40
Q

long run marginal cost function

A

M(Q) = dLRTC / dQ = L(Q) + Q[dL(Q) / dQ]

41
Q

how does M(Q) relate to LAC = L(Q) curve?

A

similar shape; M(Q) < LAC when LAC curve is decreasing. M(Q) = LAC when LAC is minimized. M(Q) > LAC when LAC is increasing

42
Q

what happens to long run marginal cost function if the manager has chosen optimal scale of plant

A

M(Q) = short run MC at that level of output

43
Q

define economies of scale

A

when a firm’s avg unit cost decreases as output increases

44
Q

how can we tell if a firm has economies of scale from LAC curve

A

if it is decreases as output increases (downward sloping)

45
Q

define diseconomies of scale

A

when avg cost per unit of output increases as output increases

46
Q

explain economies of scope

A

exist when cost of jointly producing 2 or more products is cheaper than producing each of the products separately

47
Q

formula for if economies of scope is possible

A

if S = C(Q1) + C(Q2) - C(Q1 + Q2) / C(Q1 + Q2) is positive, then there is economies of scope

48
Q

what is break even

A

what level of output equates revenue and costs; output level that must be reached if managers are to avoid losses

49
Q

formula for break even level of output QB

A

QB = TFC / (P - AVC)

50
Q

define profit contribution analysis

A

break even analysis to understand relationship between price and profit

51
Q

formula to figure out what level of sales would earn a specific profit

A

Q = TFC + profit target / profit contribution per unit

52
Q

formula for profit contribution

A

total revenue - TVC or on a per unit basis: Price - AVC

53
Q

formula for economic profit

A

accounting profit - opportunity cost

54
Q

when is AP=MP

A

when AP is maximized

55
Q

what can economies of scale result from

A

larger plant size and/or increase in # of plants

56
Q

how can economies of scale by exploited?

A

by changes in production, distribution, raising capital, advertising and other business processes

57
Q

what does S measure in economies of scope formula?

A

the percentage of saving that results from producing jointly over individually

58
Q

LAC graph

A

U with x - quantity of output, y - average cost

EC 260 (11 decks)

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