Unit Five Flashcards
Explicit costs
Costs paid by a firm for inputs of production
Require actual dollars that are paid out
Fixed costs
Costs a firm is committed to even if they are not producing any products
Fixed costs DO NOT vary as output increases/decreases
Short-run
As long as one of the costs is fixed, the firm is operating in the short run
In the long run firms can adjust their fixed costs
Variable cost
Costs that:
Increase with an increase in output
Decrease with a decrease in output
Total cost
Total fixed cost + total variable cost
Average fixed cost (AFC)
(Total fixed cost) / (output)
Average variable cost (AVC)
(Total variable cost) / (output)
Average total cost (ATC)
(Total cost) / (quantity)
Marginal cost (MC)
(Change in total cost) / (change in output)
Accounting profit
The profit used by accountants
(Total revenue) - (total explicit costs) = accounting profit
Implicit costs
Opportunity costs of doing business
Forgone income that could be generated by
•the financial capital tied up in the business
•the proprietor or partner’s salaries at another job
These costs do not require an outlay of money by the firm
Economic profit
(Total revenue) - (total explicit costs + total implicit costs)
(Accounting profit) - (implicit costs)
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
Marginal product
The increase in output that arises from an additional increase in input
Law of diminishing marginal returns
As you add inputs for production, the output gained from each input eventually decreases
Usually due to overcrowding
Aka diminishing marginal product
Shape of the marginal cost curve
In the short run
MC initially decreases as workers get more productive (specialization)
MC increases as diminishing marginal returns kicks in
Curves down a little then curves up again
Cost minimization rule
Firms will employ the input that gives them the most marginal productivity per dollar
MP / $
Firms will hire until
(MPl / $l) = (MPk / $k)
Long run total cost curves
Long run total cost curves are u-shaped because of economies of scale, returns to scale, and diseconomies of scale
Long run average cost curve
Curves down for a little, then levels out for a while, then curves up increasingly
Quantity produced on x axis, average cost per unit on y axis
Economies of scale
First portion of long run average cost graph
Long run average total cost falls as the quantity increases
The firm can alter all inputs (none are fixed) to increase production while lowering costs
Firms keep most productive resources and cut waste
Constant returns to scale
Second portion of graph (leveled out)
Long run average total cost stays the same as quantity of output changes
Depicts range of the lowest cost per unit
The firm has maximized use of its resources
Diseconomies of scale
Long run average total cost rises as the quantity of output increases
Occurs because the firm has become too large (i. e. problems of efficiency, bureaucracy, etc.) or run out of productive resources
Overcrowding
Too many laborers sharing a fixed input
