Theory of Cost Flashcards
What is the definition of Economic Cost?
Economic Cost is defined in terms of the cost of the foregone or sacrificed alternative, including both accounting cost and opportunity cost.
What are Accounting Costs?
Accounting costs, also known as explicit costs, are costs that involve money being spent, such as rent, interest payments, and utility bills.
What is the formula for Economic Costs?
Economic Costs = Explicit Costs + Implicit Costs
What are Explicit Costs?
Explicit Costs are out-of-pocket or actual expenditures made by business firms, usually paid to non-owners and recorded in financial statements.
What are Implicit Costs?
Implicit Costs are costs of self-owned or self-employed resources, with no actual monetary payments made.
What are the two types of costs in the Short Run?
Fixed Costs and Variable Costs
What is the relationship between Total Cost, Fixed Cost, and Variable Cost?
Total Cost = Fixed Cost + Variable Cost
How is Average Cost calculated?
Average Cost = Total Cost / Quantity
How is Marginal Cost calculated?
Marginal Cost = ΔTotal Cost / ΔQuantity
What is Economies of Scale?
Economies of Scale is defined as a fall in the long-run average costs due to an increased scale of production.
List examples of Internal Economies of Scale.
- Technology
- Buying Power
- Financial capacity of large firms in acquiring credit
List examples of External Economies of Scale.
- Transportation
- Skilled Labor
- Specialization of labor
What are some causes of Diseconomies of Scale?
- Difficulty in managing large workforce
- Difficulty in coordinating information across factories
What is a significant example of Poor Communication in Diseconomies of Scale?
Ineffective flow of communications between departments, divisions, and subsidiaries.
What is Long Run Total Cost (LTC)?
Long Run Total Cost refers to the minimum cost at which a given level of output can be produced.
What is Long Run Average Cost (LAC)?
Long Run Average Cost is equal to long run total costs divided by the level of output.
What is Long Run Marginal Cost (LMC)?
Long Run Marginal Cost is defined as the added cost of producing an additional unit of a commodity when all inputs are variable.
Fill in the blank: Economic costs include _______ and _______.
[explicit costs] and [implicit costs]
True or False: Accounting costs include both implicit and explicit costs.
False
What is the formula for Average Variable Cost?
Average Variable Cost = Variable Cost / Quantity
What is the formula for Average Fixed Cost?
Average Fixed Cost = Fixed Cost / Quantity
What happens to the cost per unit of production as a firm achieves economies of scale?
The cost per unit of production decreases.
What is the Principal-Agent Problem?
It occurs when owners of large firms delegate decision making to appointed managers, leading to inefficiencies.
List some examples of Diseconomies of Scale.
- Poor Communication
- Coordination difficulties
- Management Inefficiency
- Low worker motivation
- Complacency
