The Costs Of Production Flashcards
What is opportunity cost?
The cost that we incur by losing the opportunity of undertaking other courses of action
What is the difference in terms of how accountants and economists view profit?
Economists view profit as part of the cost of a business rather than accountants who see it as revenue minus expenditure. The rationale behind this view is that the entrepreneur will only remain committed to business if it generates sufficient profits to cover his or her expected return. (Normal profits)
What are normal profits?
A compensation for the entrepreneur for
- the loss of income which they would have otherwise have earned
- the cost in terms of interest lost on the capital injected into the business
- the risk they have undertaken starting their own business as opposed to working for somebody else
These profits represent a fixed cost of business and if they are not met the entrepreneur will logically close down
What is the short run?
When at least one of the factors of production are fixed?
What is the long run?
When down of the factors of production are fixed
In the short run, what determines the behaviour costs?
The law of increase and then decreasing returns to a factor!
What does the law of increasing and then decreasing returns to a factor state?
Given a fixed capital stock, it will be possible, by injecting more labour, to gradually increase production until that capital stock is operating at its optimal level. Beyond this point, each additional unit of labour which is added to the factory will produce less, hence increasing, then decreasing returns to the factor
What is the difference between average fixed costs and average variable costs?
Fixed costs are the same regardless of the level or output whilst variable costs change depending on output
What happens to average fixed costs as production increases?
They decline as the total cost is divided over a progressively greater quantity of output
What happens to AVC as production Increases?
They initially decline as the company benefits for increasing returns to the factor (labour). However eventually, decreasing returns set in and at this point, AVC begin to rise.
What happens to average total costs as production increases?
The increase in AVC is offset by continuing falls in in AFC but AVC strengthens and eventually outweighs thenAGC reduction
What is the most important cost curve?
Marginal costs curve (MC)
What does the MC curve measure?
The impact on total costs of one additional unit of production
Where does the MC cut both ATV and AVC curves?
At their lowest point
What is the minimum point?
Where MC cuts AC when AC is neither rising nor falling
