Module 6 - Production Flashcards
Why do we need to calculate average costs?
The numbers are more manageable and allow us to compare them directly with price and determine profitability.
Why do we break the ATC into it’s two components: AFC and AVC? (Two reasons)
- Examining AFC alone helps us see that it is an ever-decreasing function of output. (The more output a firm produces, the more it spreads out it’s total fixed cost)
- AVC will be used later to determine whether a firm that is losing money should continue to operate or it should shut down in the short run.
In deciding on how much output should be produced to maximize profits, firms need two pieces of information:
- ___
- ___
- Marginal cost (cost associated with producing an additional unit of output)
- Marginal revenue (extra benefit associated with producing that unit of output)
If MC > ATC, then ATC ___.
↑
If MC > AVC, then AVC ___.
↑
If MC < ATC, then ATC ___.
↓
If MC < AVC, then AVC ___.
↓
If MC = ATC, then ATC ___.
Remains unchanged
If MC = AVC, then AVC ___.
Remains unchanged
___ is the cost associated with the use of resources; the sum of explicit and implicit costs.
Economic costs
___ are monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others; also called accounting costs.
Explicit costs (seen)
___ is the opportunity costs of using owned resources; costs which no monetary payment is explicitly made.
Implicit (unseen)
Accounting profit is ___.
TR - explicit costs
Economic profit is ___.
TR - economic costs
Economic costs are ___.
Explicit costs - implicit costs
Total revenue is ___.
Price (Qt)
Zero accounting profit means ___. When Implicit costs are taken into account then ___.
You’re making enough to cover all monetary expenses.
Your economic profit is negative, which isn’t good
Zero economic profit means ___.
Your revenues are covering all explicit and implicit costs - you’re doing just as well as you could in your next-best option.
___ is the time period in which at least one input of production is fixed, but other inputs can be changed.
Short-run
___ is the total amount of output produced when given the amount of resources.
Total product (TP)
___ is the additional output produced as a result of utilizing one more unit of variable resource.
Marginal product (MP)
___ is the average amount of output produced per unit of a resource employed.
Average product (AP)
___ is a characteristic of production whereby the marginal product of the next unit of variable resource utilized is greater than that of the previous variable resource.
I.e., not enough employees resulting in overworked employees
Increasing marginal returns
___ is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.
I.e., too many employees resulting in less productive hours
Diminishing marginal returns
___ are costs that do not allow for change with the amount of output produced.
Fixed costs
___ are costs that change with the amount of output produced, increasing as production increases and decreases as production decreases.
Variable costs
___ is the sum of fixed and variable costs of production.
Total costs
On a graph, where is TC, TVC, and TFC?
A - TC
B - TVC
C - TFC
___ is fixed cost per unit.
Average fixed cost (AFC)
___ is variable cost per unit.
Average variable cost (AVC)
___ is the total cost per unit
Average total cost (ATC)
On a graph, where is ATC, AVC, and AFC?
A - ATC
B - AVC
C - AFC
___ is the additional cost associated with one more unit of an activity; difference between P2 - P1.
Marginal cost (MC)
The average value ___ when the marginal value rises above it.
↑
The average value ___ when the marginal value falls below it.
↓
The average value ___ when the marginal value is equal to it.
Stays unchanged
___ is a curve showing the ATC for different levels of output when at least one input of production is fixed, typically plant capacity.
Short-run ATC (avg total cost)
___ is a curve showing the lowest ATC possible for any given level of output when all inputs of production are variable.
Long-run ATC (avg total cost)
___ is a condition in which the long-run ATC of production decreases as production increases.
Economies of scale
Economies of scale can result form a variety of factors including productivity gains from ___ and ___ as firms purchase larger quantities and benefit from ___.
More specialized labor
Lower costs of inputs
Bulk pricing
What does the colored portion of the graph represent?
Economies of Scale
Output increases as ATC decreases
Benefit from bulk pricing and larger Q purchases
___ is a condition in which the long-run ATC of production increases as production increases.
Diseconomies of scale
What does the colored portion of the graph represent?
Constant returns to scale
Additional output doesn’t affect LRATC
Constant returns to scale occur because the firm is ___ or ___; they reach minimum level of output necessary to achieve the lowest possible LRATC.
Unable to benefit from further efficiency gains
Lower input costs
___ is a condition in which the long-run ATC of production remains constant as production increases.
Constant returns to scale
What does the colored portion of the graph represent?
Diseconomies of scale
LRATC (long-run average total cost) of production increases as output increases
Lower levels of efficiency
Diseconomies of scale shows as firms continue to grow, it becomes more difficult to manage; ___ and ___ contribute to lower levels of efficiency -
Increasing costs
Complexity
___ is the lowest level of output at which the long-run ATC is minimized.
Minimum efficient scale
What does the arrow point to on the graph?
Minimum efficiency scale is the lowest level of output at which the long-run ATC is minimized.
___ refers to the lowest level of output at which the LRATC is minmized.
Minimum-efficiency sacle
The shape of the marginal cost curve is dependent upon ___.
Law of diminishing marginal returns
