Mod 3 Costs Of Production Flashcards
What is an opportunity cost? The ‘if things were different’ cost?
The amount of other products that must be sacrificed to obtain a unit of any other product (making tractors or washing machines - to make 20 tractors you forgo the 100 washing machines you could have made with the resources )
What is an explicit cost?
Payments to ‘outsiders’ of the business who supply labour, materials, fuel, transport services, power and so on.
Can be measured, tracked balanced. Rent or mortgage payments. Utilities… All can be calculated.
They are paid to non-owners of the firm.
What is an implicit cost?
An opportunity cost. Difficult to calculate, are incurred regardless of revenue
Money based income that a firm sacrifices why it employs a resources it owns to produce a product rather than supplying the resource in the market.
A lolly company has such demand for its product it cannot fill all their orders. They run their manufacturing plant for 40 hours per week. They have the possibility of running their machinery for 60 hours per week, which would mean they could make additional profit of $50,000 per week. The explicit cost is 50 grand if they leave the machinery idle for the 10 hours.
For instance, Anna starts her own printing company. She forgoes the wage and interest she earned from her previous job as a lawyer in someone else’s firm and commits it to her own firm.
A couple operate a convenience store, they own the property. To run the store they give up the income they could receive if they rented it out.
Explain normal profit?
Normal profit is a cost.
It is the minimum payment for entrepreneurship. It’s The break even point, revenues are equal to total costs.
If the enterprise was not achieving this then the resources would have to be put to better use. Like close the business down and work for someone else for a wage.
What is economic profit?
Not to be confused with accounting profit, this is the total revenue of a firm less all it’s economic costs. This includes entrepreneurial costs.
Also known as pure profit.
What short run resources ?
A period of time where at least one factor is variable and all others fixed. This is particularly relevant to technology and the size of a firms physical plant.
A pizza place can easily increase its plant by adding another pizza oven and tables and chairs in the short run.
BMW may take two years to increase their plant.
What are long run variables?
This is where a firm can change ALL of its resources.
Holden can change a short run variable by adding/removing 100 staff.
If it were to add a new wing to its plant would be a long run adjustment.
What is the law of diminishing returns?
As more units of a resource (ie: labour) are added to a fixed resource (ie: capital or machinery) beyond some point the marginal (extra) product attributable to each additional unit will decline.
Ex: a cafe will make max profit from having 5 workers, but for each additional worker profit is reduced.
Illustrate a graph showing law of diminishing returns?
See graph 5, demonstrate it.
Explain the relationship between total product, marginal product and average product?
MP, marginal product is the additional output as a result of adding one extra unit of a resource (say, labour).
AP, average product is the total out put per unit of resource employed & the total product divided by number of workers.
TP, total product is the total output of a good produced by a firm.
Explain fixed, variable and total costs?
Fixed costs: do not vary with changes in output
Variable costs: vary with changes in output
Total costs: are the SUM of fixed & variable costs at each level of out put
Usually represented on a table
Explain average costs?
- Average fixed cost = TFC / Q
- average variable cost = TVC / Q
What is the Marginal cost calculation?
MC is the extra, or additional cost of producing one more unit of output
MC = change in total costs / change in quantity
Draw and explain a short run average costs curve?
See graph 6
Explain the relationship between marginal costs - what happens when they rise, fall or it it’s minimum?
When MC is LESS than AC - then ATC falls
When MC is GREATER than ATC - then ATC will increase.
When ATC = MC - then ATC is at a minimum
