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Economics > Week 4 - Production and Cost > Flashcards

Week 4 - Production and Cost Flashcards

1
Q

What is a short run?

A

The period of time during which at least one of the firm’s inputs is fixed.

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2
Q

What is a long run?

A

A period of time long enough to allow a firm to vary all its inputs to adopt new technology, and to increase or decrease the size of its physical plant.

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3
Q

What is an explicit cost?

A

A cost that involves spending money.

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4
Q

What is an implicit cost?

A

A non-monetary opportunity cost, eg forgone income that could be earned.

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5
Q

How is output with a fixed plant increased (short run production and cost)?

A

To increase output with a fixed plant, a firm must increase the quantity of labour it uses.
To produce more output in the short run, a firm employs more labour which means the firm must increase its costs.

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6
Q

What are the three concepts that describe the relationship between output and quantity of labour?

A

o Total product
o Marginal product
o Average product

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7
Q

What is total product (TP)?

A

The total quantity of a good produced in a given period. Total product increases as the quantity of labour employed increases.

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8
Q

What is marginal product of labour (MP)?

A

The additional output a firm produces as a result of hiring one more worker. Tells us the contribution to total product of adding one more worker.

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9
Q

How is marginal product (MP) calculated?

A

Marginal product = change in total product divided by change in quantity of labour.

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10
Q

Why does the marginal product of labour rise at first?

A

Increasing marginal returns initially (due to division of tasks and specialisation).

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11
Q

Why does the marginal product of labour eventually fall?

A

o Decreasing marginal returns due to law of diminishing returns – as a firm uses more of a variable input (labour) with a given quantity of fixed inputs (capital), the marginal product of the variable input (labour) eventually decreases.
o Negative marginal returns (due to overcrowding).

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12
Q

What is average product (AP)?

A

The total product per worker employed.

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13
Q

How is average product (AP) calculated?

A
  • Average product of labour = total product/quantity of labour.
  • AP = TP/L
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14
Q

What is the relationship between marginal and average product?

A
  • Marginal > average (this will pull average up)
  • Marginal < average (this will pull average down)
  • MP must always intersect maximum AP.
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15
Q

What are the three concepts that describe the relationship between output and cost?

A

o Total cost
o Marginal cost
o Average cost

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16
Q

What is total cost (TC)?

A

The cost of all the factors of production the firm uses.

17
Q

How is total cost (TC) calculated?

A
  • Total cost is the sum of total fixed cost and total variable cost.
  • TC = TFC + TVC
18
Q

What is total fixed cost (TFC)?

A

The cost that doesn’t change as output changes. Example: rent – the cost of land, capital and entrepreneurship.

19
Q

What is total variable cost (TVC)?

A

The cost that changes as output changes (to change its output in the short run, a firm must change the quantity of labour it employs). Example: the cost of labour.

20
Q

What is average fixed cost (AFC)?

A

Total fixed cost per unit of output.

21
Q

How is average fixed cost (AFC) calculated?

A

AFC = TFC/Q

22
Q

What is average variable cost (AVC)?

A

Total variable cost per unit of output.

23
Q

How is average variable cost (AVC) calculated?

A

AVC = TVC/Q

24
Q

What is average total cost (ATC)?

A

Total cost per unit of output.

25
Q

How is average total cost (ATC) calculated?

A

ATC = TC/Q or ATC = AFC + AVC

26
Q

What is marginal cost?

A

The change in a firm’s total cost from producing one more unit of a good or service. It is the extra cost of producing one more unit.

27
Q

What relationship does productivity and cost have?

A
  • Productivity and cost have an inverse relationship.
  • Productivity rises, costs will fall. MP ^, MC v, AP ^, AVC v.
  • Productivity falls, costs will rise. MP v, MC ^, AP v, AVC ^.
28
Q

If marginal is greater than average, average will be pulled ______

A

Up

29
Q

If marginal is below average, average will be pulled ______

A

Down

30
Q

MC must always intersect ______

A

Minimum ATC and AVC.

31
Q

MP must always intersect ______

A

Maximum AP.

32
Q

Average fixed cost (AFC) ______ as output increases

A

Average fixed cost (AFC) decreases as output increases.

33
Q

Average variable cost curve (AVC) and average total cost curve (ATC) are what shape?

A

U-shaped.

34
Q

What is the distance between ATC and AVC?

A

AFC, which gets closer and closer.

35
Q

What shape is the marginal cost curve?

A

U-shaped.

36
Q

What is the long run average cost curve?

A

A curve showing the lowest cost at which the firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

Economics (9 decks)

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