Unit 5 Flashcards
Explicit cost
Costs paid by a firm for inputs of production
Require actually money paid
Land, labor, capital
Two types of explicit costs
Fixed and variable
Fixed cost
Doesn’t change
Costs a firm is committed to even if they are not producing any products
Ex. Rent, employees, securities, loans to buy machines
Fixed costs in the short and long run
SHORT RUN: if one of the costs is fixed, the firm is operating in the short run
LONG RUN: firms can adapt their costs
Variable costs
Costs that change
Increase with an increase in output, decrease with a decrease in output
Ex. Lemons in a lemonade stand, electricity for store, ingredients for food
Economic profit
Total revenue-implicit and explicit costs (opportunity cost) of goods and services being produced
Accounting profit
Total revenue-explicit costs
Implicit cost
Do not require an outlay of cash by the firm
Opportunity costs of doing business
Normal profit
exists when economic profit is ZERO or a firm is just covering its explicit and implicit costs
The firm would be said to be earning a Normal profit if it’s accounting profit equaled its implicit costs
Production function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
The increase in output that arises from an additional unit of input
Change in total cost/Change in output
Diminishing marginal product
As the marginal product of an input declines, the quantity of the input increaes
Average total cost
Total cost/quantity of output
Average fixed cost
Fixed cost/quantity of output
Average variable cost
Variable cost/quantity of output
Marginal cost
Increase in total cost from each unit of production
Shape of marginal cost curve
Where does it cross the ATC and AVC curves?
Increases
With more output, more money is made. Cost rises with output
Crosses with ATC and AVC curves at their MINIMUM points
Shape of ATC curve
Why is it this shape?
U shaped, because ATC is the sum of AFC and AVC. AFC always declines as output rises because fixed cost is getting spread over many units. At low levels of output, ATC is high because the fixed cost is only spread across a few units. ATC declines as output increases. At a certain point, ATC rises because AVC begins rising.
Short run ATC curve
Small increasing and decreasing curves
Long run ATC curve
Long and flat
Economies of scale
When long run average total cost declines as output increases
The firm can alter all inputs (none) are fixed
Firms keep most productive resources and cut waste
Constant returns to scale
Long run ATC stays the same as quantity of output changes
Firm has maximized resources
Depicts range of lowest cost per unit
Diseconomies of scale
Long run ATC rises as quantity of output changes
Occurs because the firm has become too large (ex. Problems of efficiency, bureaucracy, etc.) or run out of productive resources
