ppt 11-13: production function, competitive markets Flashcards
explicit costs
input costs that require an outlay of money by the firm
implicit costs
input costs that do not require an outlay of money by the firm i.e. the fact that i can make $100 as a freelance designer might not cost my cookie business any money, but is a cost to myself bc of the lost opportunity
economic profit
total revenue minus total cost, including both explicit and implicit costs
accounting profit
total revenue minus total explicit cost
Why is accounting profit smaller than economic profit?
Because economists include all opportunity costs when analyzing a firm, including explicit and implicit, whereas accountants measure only explicit costs.
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
marginal product (aka marginal output)
the increase in output that arises from an additional unit of input
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
total-cost curve
on a graph, measures the relationship between quantity produced and total cost of production
Why might the total-cost curve get steeper?
As the quantity of output increases, cost may be higher because of diminishing marginal product -> cost of workers for the marginal output produced becomes less worth it
marginal cost
the increase in total cost that arises from an extra unit of production
(change in total cost) / (change in quantity)
What are the three most common features of a cost curve?
1) Marginal cost rises with quantity of output
2) ATC curve is U-shaped
3) Marginal-cost curve crosses the ATC curve at the minimum of ATC
efficient scale
the quantity of output that minimizes ATC
Why does ATC have a positive relationship with the increase and decrease of marginal costs? Compare with an analogy.
ATC is like cGPA, with MC like the grade in your next course. As the grade in your next course drops, so does ATC. vice versa is true. This results in the MC curve crossing the ATC at the efficient scale. (i.e. getting the same grade in your next course as your cGPA)
Why does a firm’s long run cost curves differ from its short run cost curves?
Because many decisions are fixed in the short run but variable in the long run -> thus division of total costs between fixed and variable costs depends on the time horizon
economies of scale
long-run ATC falls as quantity of output increases (aka less cost by producing in bulk) -> may occur bc of specialization among workers i.e. in an assembly line
