Theory of Cost Flashcards

1
Q

What is the definition of Economic Cost?

A

Economic Cost is defined in terms of the cost of the foregone or sacrificed alternative, including both accounting cost and opportunity cost.

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2
Q

What are Accounting Costs?

A

Accounting costs, also known as explicit costs, are costs that involve money being spent, such as rent, interest payments, and utility bills.

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3
Q

What is the formula for Economic Costs?

A

Economic Costs = Explicit Costs + Implicit Costs

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4
Q

What are Explicit Costs?

A

Explicit Costs are out-of-pocket or actual expenditures made by business firms, usually paid to non-owners and recorded in financial statements.

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5
Q

What are Implicit Costs?

A

Implicit Costs are costs of self-owned or self-employed resources, with no actual monetary payments made.

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6
Q

What are the two types of costs in the Short Run?

A

Fixed Costs and Variable Costs

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7
Q

What is the relationship between Total Cost, Fixed Cost, and Variable Cost?

A

Total Cost = Fixed Cost + Variable Cost

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8
Q

How is Average Cost calculated?

A

Average Cost = Total Cost / Quantity

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9
Q

How is Marginal Cost calculated?

A

Marginal Cost = ΔTotal Cost / ΔQuantity

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10
Q

What is Economies of Scale?

A

Economies of Scale is defined as a fall in the long-run average costs due to an increased scale of production.

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11
Q

List examples of Internal Economies of Scale.

A
  • Technology
  • Buying Power
  • Financial capacity of large firms in acquiring credit
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12
Q

List examples of External Economies of Scale.

A
  • Transportation
  • Skilled Labor
  • Specialization of labor
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13
Q

What are some causes of Diseconomies of Scale?

A
  • Difficulty in managing large workforce
  • Difficulty in coordinating information across factories
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14
Q

What is a significant example of Poor Communication in Diseconomies of Scale?

A

Ineffective flow of communications between departments, divisions, and subsidiaries.

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15
Q

What is Long Run Total Cost (LTC)?

A

Long Run Total Cost refers to the minimum cost at which a given level of output can be produced.

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16
Q

What is Long Run Average Cost (LAC)?

A

Long Run Average Cost is equal to long run total costs divided by the level of output.

17
Q

What is Long Run Marginal Cost (LMC)?

A

Long Run Marginal Cost is defined as the added cost of producing an additional unit of a commodity when all inputs are variable.

18
Q

Fill in the blank: Economic costs include _______ and _______.

A

[explicit costs] and [implicit costs]

19
Q

True or False: Accounting costs include both implicit and explicit costs.

A

False

20
Q

What is the formula for Average Variable Cost?

A

Average Variable Cost = Variable Cost / Quantity

21
Q

What is the formula for Average Fixed Cost?

A

Average Fixed Cost = Fixed Cost / Quantity

22
Q

What happens to the cost per unit of production as a firm achieves economies of scale?

A

The cost per unit of production decreases.

23
Q

What is the Principal-Agent Problem?

A

It occurs when owners of large firms delegate decision making to appointed managers, leading to inefficiencies.

24
Q

List some examples of Diseconomies of Scale.

A
  • Poor Communication
  • Coordination difficulties
  • Management Inefficiency
  • Low worker motivation
  • Complacency