slide 7 Flashcards
Define accounting profit and economic accounting
accounting profit = total revenue - explicit costs
economic accounting = total revenue - economic costs
define what explicit and implicit costs are and how they relate to economic costs
explicit: involves a cash transaction
implicit: the opportunity cost of using the resources the firm already own
economic costs = explicit + implicit cost
define the difference between short and long run
short run: time where resources in production is fixed (unchangeable, for now)
long run: time frame where all resources in production is changeable
give an example of a resource that will keep a firm in the short run
firm plant, machinery
true or false: short run decisions are easily reversed
true
give an example of variable resources in the short run
labour, raw materials
how do you increase the output in the short run
increase labour
in the short run, there are three concepts that describe the relationship between output and the quantity of labour employed. what are they?
total product
marginal product
average product
define
total product
marginal product
average product
total product: the total output by x amount of employees
marginal product: the change in total product that results from employing one more person
average product of labour: total product divided by number of employees
as you increase employees what happens to
total product
marginal product
average product
and why
total product will forever increase b/c we will always be able to create more
marginal product will initially increase and then decrease b/c workers are initially very productive and at some point productivity will decrease because we lack the capitol for them to be effective
average product will initially increase and then decrease, same reasoning above, workers are initially very productive and eventually there will be too many workers for the amount of capitol, decreasing average productivity
in the total product curve, it is initially steep and then begins to plateau, why?
it is steep because workers are initially more productive via specialization and division of labour, but eventually adding one more worker will be inefficient because we are bounded by the amount of capitol we have
in the marginal product curve the the vertical distance between the individual points increase and then decrease, why?
you make more for every worker you add at the beginning, but then the amount gained from an additional worker decreases because of limited capitol
what is the law of diminishing returns
it states that as a firm uses more of a variable input with a fixed input the marginal product of the variable eventually decreases
What is can you tell from the average product curve and marginal product curve when plotted together
when the marginal product curve > than average product curve then, average product increases
when the marginal product curve is below the average product curve, the average product decreases
when the marginal product = average product, the average product is at its maximum
in the short run, we increase labour and thus costs increase
there are three cost concepts, what are they?
total cost
marginal cost
average cost
define
total cost
total fixed cost
total variable costs
and their relation
total cost: cost of all resources used
total fixed cost: cost of the firm’s fixed inputs, fixed costs will not change regardless of what the output amount is)
total variable costs: the cost of the firm’s variable inputs, variable inputs will differ depending on the quantity produced
TC = TFC + TVC
what is the relation between the total product (TP) curve and the TVC curve
the TVC curve gets its shape from the TP curve.
at low outputs, TP curve is steeper and less steep at high outputs
at low outputs, the TVC curve is less steep and steeper at high outputs
define marginal cost
what does it mean to have increasing/diminishing marginal returns
marginal cost is the increase in total cost that results from a one-unit increase in total product
if you have increasing marginal returns, the marginal costs decrease as output increases (good for firm)
if you have diminishing marginal returns, the marginal costs increase as output increases (bad for firm)
define average cost and how it is related to
average fixed cost
average variable cost
average fixed cost:
total fixed cost per unit of output
total variable cost:
total variable cost per unit of output
total average cost: total cost per unit of output
ATC = AFC + AVC
which is
(TC = TFC + TVC) / Quanitity
how does AFC look in a graph
how does AVC look in a graph
AFC: decreases, b/c we are distributing a fixed cost over more an more units
AVC: Swoops down (U-shape) then up b/c workers are initially productive and then less productive
how does the ATC look in a graph?
ATC is also a U-shape
how does the AVC relate to the MC curve in a graph
if AVC is decreasing, the MC is below the AVC
if AVC is increasing, the MC is above the AVC
if AVC = MC, it means the AVC is at its minimum
how does ATC relate to MC in a graph
If ATC is falling MC is below ATC
if ATC is increasing, MC is above ATC
if ATC = MC, we are at ATC minimum
what will cause a shift in a firm’s cost curve
technology and prices of factors in production
true or false: even if we increase the firm’s plant we will still be subject to diminishing returns
true, it will always exist regardless of increasing plant sizes and increasing labour. we will have diminishing marginal product of capital
what is the marginal product of capital
the increase in output resulting from a one-unit increase in the amount of capital (labour stays constant)
true or false: for each plant, diminishing marginal product of labour creates a set of short run, U-shaped curves for MC, AVC, ATC
true
true or false: each plant has a short-run ATC curve
true
what is the long-run average cost (LRAC) curve made from
the lower bound of the ATC for each output (plant) level
define economies of scale
diseconomies of scale
constant returns to scale
economies of scale: features of a firm’s technology that leads to falling LRAC as output increase
diseconomies of scale: features of a firm’s technology that leads to rising LRAC as output increases
Constant returns: features of a firm’s technology that leads to constant LRAC as output increases
what is the minimum efficient scale
the smallest quantity of output where the LRCA reaches its lowest level
