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
