Theory of Cost Flashcards
Distinguish between opportunity cost and real cost
Opportunity cost is the value of the next best-foregone alternative while real cost is the actual expenses incurred when producing or consuming a commodity.
Distinguish between economic cost and accounting cost.
Economic cost is the total expenditure incurred when using economic resources to produce goods and services while accounting cost is the recorded cost of an activity.
Distinguish between implicit and explicit cost.
Implicit cost is the opportunity cost of the resources owned by the firm while explicit costs are the monetary outlays made by the firm.
Distinguish between normal profit and economic profit
Normal profit is the minimum profit required to keep a business running while economic profit is the difference between total revenue and total opportunity cost including explicit and implicit costs.
Distinguish between social cost and private cost
Social costs are the costs that can be appropriated to third parties in the production process while private costs are costs that can be appropriated or ascribed directly to individual firms.
Distinguish between short run and long run
The short run is said to be that period of time that is too short such that: Some inputs will have to remain fixed, the firm cannot change its scale of plant as determined by the fixed factors; the firm cannot quit the industry as it would not have time to liquidate, a new firm cannot join the industry as it will not have the time to establish plant and start operation.
The long run is that period of time long enough such that: the firm can vary all its inputs, the firm can vary its scale of plant, the fimr can quit the industry and the fimr can establish plant and join the industry.
Explain the interrelationships between Average product, Average cost, Marginal
product and marginal cost
Average product represents the average output produced by each unit of input. When AP increases, MP is greater than AP. When AP is decreasing, MP is less than AP.
Marginal Product measures the additional output gained by adding one more unit of input. MP intersects with AP at its maximum point.
Average cost is the total cost divided by the quantity produced. AC decreases when marginal cost is less than AC, and AC increases when MC exceeds AC.
Marginal Cost is the additional cost incurred by producing one more unit. MC intersects with AC at its minimum point.
A producer owns two plants. Both have constant marginal costs. However, the
fixed cost of one plant differs from those of the other. Explain whether the
producer can operate the two plants simultaneously
The producer can indeed operate both plants simultaneously, optimizing resource allocation based on costs and production efficiency. Fixed costs remain the same regardless of whether goods or services are produced or not. If the variable costs for both plants are constant, they won’t affect the distribution of production. However, if one plant has relatively lower variable costs, it will produce more of the total output.