Module 8 Study Guide Flashcards
What are economic and accounting profits?
The accountant wants to know how much money do you have. How much money is in your account? Do you owe money? Can you pay your bills? Bills, revenue stream, etc. Total revenue minus explicit costs (bills you’re legally obligated to pay) show accounting profits.
Economists also want to know this, but they are a more concerned with the question: Are you satisfied with the return you got? You go into business thinking that you’re going to get some reward from it.
Did you get what you needed in order to be satisfied?
In economic profits, you subtract both explicit and implicit costs. These include what you could have reasonably expected to get back and did you get that?
You’ve reached satisfaction when economic profits equal zero.
What is the difference between implicit and explicit costs? Give an example of each.
Explicit costs are what you are legally obligated to pay.
Implicit costs are the opportunity costs of using the entrepreneur’s resources. (what he could’ve earned elsewhere) (forgone income, forgone interest, capital depreciation, risk-normal profit) implicit costs are gonna be the value of everything that the business owner is putting into the business that doesn’t get him a guaranteed return
What is the difference between the short-run and long-run?
short-run and long-run are vague terms intentionally. Short run is immediate and long run can be changed. In the short run, there’s at least one thing that cannot be changed. In the long run, all inputs are variable (you can change labor, capital, building, etc.) (long term is like the dream period where you’re imagining everything that you want)
What are total product, marginal product, and average product? How are they calculated?
Total product is just the amount you made.
Marginal product is the extra product you get from one more unit (the change in output divided by the change in your variable input-labor for example). (add one worker and get one cake)
Average product is the
What are increasing and diminishing marginal returns?
Diminishing marginal return is caused by fixed capital or resources causing a variable resource to not actually create more product. So the marginal product of labor will eventually decline as additional units of labor are added to a fixed capital.
However, as long as the marginal product of labor is positive then the total products are going up. This will also cause the price of cake to rise.
What are marginal costs, average costs, average variable costs, average fixed costs? How are they calculated?
Fixed costs are what you can’t change in the short run like land and capital. Total fixed costs do not change with the level of output. Variable cost is one that varies, often labor. You add up fixed and variable to get total cost.
Average fixed cost is your fixed cost per unit of output. Average variable cost is variable cost per unit of output. You just divide the total of each by the quantity produced to get the per unit sense of your costs (to compare to price).
Marginal cost is change in the total cost that result from a change in the total product (extra cost of making one more thing). Calculate it by dividing the change in your total cost by the change in you quantity.
Marginal cost is used to determine a good quantity for your firm to make.
