question
What are explicit costs? Give some examples.
answer
cost that involves actually laying out money. (wages, lease payments, utilities, raw materials)
question
What are implicit costs? Give some examples.
answer
does not require an outlay of money; it is measured by the value, in dollar terms, of the benefits that are forgone. (forgone salaries, forgone interest on capital, time)
question
What is accounting profit?
answer
total revenue minus the explicit costs and depreciation ONLY
question
What is economic profit?
answer
total revenue minus total opportunity cost (includes both implicit and explicit costs)
question
Economic profit is typically ___________________ than accounting profit.
answer
less
question
What is normal profit?
answer
when economic profit is equal to zero; economic profit is just high enough to keep a firm engaged in its current activity (no economic profit = normal profit)
question
When is profit maximized?
answer
when MR (marginal revenue) = MC (marginal cost)
question
What is the capital of a business?
answer
the values of its assets/resources (equipment, buildings, tools, inventory, and financial assets)
question
What is the implicit cost of capital?
answer
the opportunity cost of the capital used by a business—the income the owner could have made from that capital if it had been used in its next best alternative way.
question
How do you calculate revenue?
answer
Price per unit x quantity of units sold (revenue = price x quantity; TR = P x Q)
question
How do you calculate profit?
answer
total revenue - total costs (Profit = TR - TC)
question
What type of costs do accountants look at when calculating profit?
answer
explicit costs ONLY (accounting profit = total revenue - accounting costs)
question
What type of costs do economists look at when calculating profit?
answer
both EXPLICIT COSTS and IMPLICIT COSTS (economic profit = total revenue- economic costs)
question
In an efficient competitive market, firms that have identical products will make a ________________ profit.
answer
normal
question
Always produce where marginal revenue is _______________ to marginal cost.
answer
equal
question
What is the goal of every business?
answer
to maximize profit
question
If the marginal cost is less than marginal revenue at a certain output should the business produce that unit of output?
answer
yes
question
If the marginal cost is greater than marginal revenue at a certain output should the business produce that unit of output?
answer
no
question
If the marginal cost is equal to marginal revenue at a certain output should the business produce that unit of output?
answer
yes
question
What is marginal revenue?
answer
the change in total revenue generated by an additional unit of output.
question
How do you calculate marginal revenue?
answer
marginal revenue = change in total revenue / change in output
question
What is the optimal output rule?
answer
says that profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue.
question
What is a FIRM'S optimal output rule?
answer
says that a firm's profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to the market price.
question
What does the marginal revenue curve show?
answer
shows how marginal revenue varies as output varies.
question
On a graph that shows a marginal revenue and marginal cost curve, how can you find the quantity at which profit is maximized?
answer
Find the point where the MR curve and MC curve intersect, and whatever quantity that point is at is the profit maximizing quantity
question
Production is profitable when the firm's optimal quantity of output at the market price results in (at least) a __________________.
answer
normal profit
question
If there is no output level at which MR=MC, how much should a firm produce?
answer
the firm should produce the largest quantity at which MR is greater than MC.
question
What is a production function?
answer
the relationship between the quantity of inputs a firm uses and the quantity of output it produces.
question
What is a fixed input?
answer
an input whose quantity is fixed for a period of time and cannot be varied
question
What is a variable input?
answer
an input whose quantity the firm can vary at any time.
question
What is considered the long run in economics?
answer
the time period in which all inputs can be varied.
question
What is considered the short run in economics?
answer
the time period in which at least one input is fixed.
question
What is total product?
answer
total output produced by a firm
question
What is the total product curve?
answer
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input.
question
How does the total product curve slope?
answer
it slopes upward along its entire length, the slope isn't constant: as you move up the curve to the right, it flattens out due to changing marginal product of labor.
question
What is the marginal product of an input?
answer
the additional quantity of output that is produced by using one more unit of that input
question
What is the marginal product of labor?
answer
the marginal product of an input when the input is a worker (labor)
question
How do you calculate marginal product?
answer
marginal product = change in total product / change in inputs
question
What is average product?
answer
output per unit of input
question
How do you calculate average product?
answer
average product = total product / units of labor
question
What are diminishing returns to an input?
answer
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
question
What is the law of diminishing marginal returns?
answer
states that as variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall.
question
What is the first stage of returns?
answer
Increasing marginal returns; MP is rising and TP is increasing at an increasing rate (because of specialization)
question
What is the second stage of returns?
answer
Decreasing marginal returns; MP is falling and TP is increasing at a decreasing rate (because of fixed resources; each worker adds less and less)
question
What is the third stage of returns?
answer
Negative marginal returns; MP is negative and TP is decreasing (because workers get in each others way)
question
The law of diminishing marginal returns is the result of ___________________.
answer
limited fixed resources
question
What is a fixed cost? What are some examples?
answer
a cost that does not depend on the quantity of output produced. It is the cost of the fixed input. (ex. rent, insurance, manager salaries)
question
What is average fixed cost?
answer
the fixed cost per unit of output
question
How do you calculate average fixed cost?
answer
average fixed cost = fixed cost / quantity of output
question
What is a variable cost? What are some examples?
answer
a cost that depends on the quantity of output produced. It is the cost of the variable input. (ex. raw materials, labor, electricity)
question
What is average variable cost?
answer
the variable cost per unit of output
question
How do you calculate average variable cost?
answer
average variable cost = variable cost / quantity of output
question
What is total cost?
answer
the sum of the fixed and variable costs
question
How do you calculate total cost?
answer
total cost = fixed costs + variable costs
question
How do you calculate average total cost?
answer
average total cost = total cost / quantity of output
question
What is average total cost?
answer
often referred to simply as average cost, it is total cost divided by quantity of output produced.
question
What is marginal cost?
answer
the additional cost of producing one more unit of a good
question
How do you calculate marginal cost?
answer
marginal cost = change in total cost / change in quantity of output
question
What two effects does increasing output have on average total cost?
answer
the spreading effect and the diminishing returns effect
question
What is the spreading effect?
answer
the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost.
question
What is the diminishing returns effect?
answer
the larger the output, the greater the amount of variable input required to produce additional units leading to higher average variable cost.
question
What is the minimum cost output? Where is it located on the total cost curve?
answer
the quantity of output at which average total cost is lowest; its located at the bottom of the U-shaped average total cost curve.
question
At the minimum-cost output, average total cost is _______________ marginal cost.
answer
equal to
question
At output less than the minimum-cost output, marginal cost is _________________ average total cost and average total cost is falling.
answer
less than
question
At output greater than the minimum-cost output, marginal cost is _______________ average total cost and average total cost is rising.
answer
greater than
question
When MC is below ATC, what effect does it have on the ATC?
answer
it pulls the ATC down
question
When MC is above ATC, what effect does it have on the ATC?
answer
it pulls the ATC up
question
In the _____________ fixed cost is completely outside the control of a firm.
answer
short run
question
In the long run a firm's _______________ becomes a variable it can choose.
answer
fixed cost
question
If fixed cost increases, what happens to the cost curves?
answer
ONLY AFC and ATC increase
question
If variable cost increases, what happens to the cost curves?
answer
MC, AVC and ATC all increase
question
If the quantity of fixed input increases what happens to the marginal product and total product curves?
answer
the both shift upward (both MP and TP increase)
question
What is the point where the marginal cost curve intersects the average total cost curve from below called?
answer
the minimum cost output
question
What is the shape of the total product curve? Why?
answer
upward sloping curved line because as more inputs are added, total product increases, but at a decreasing rate, so it curves upward, but not a constant upward rate
question
What is the shape of the marginal product curve? Why?
answer
upward then downward sloping because as more inputs are added, at first specialization leads to more production, but then workers get in each others way so they produce less marginal product each time and the curve slopes downward (diminishing returns)
question
What is the shape of the marginal revenue curve?
answer
horizontal line at the market price because this is how much a buyer pays for each output sold
question
What is the shape of the total cost curve? Why?
answer
upward sloping because as output increases, so does total cost
question
What is the shape of the marginal cost curve? Why?
answer
downward sloping at first than upward sloping because there are diminishing returns to inputs
(as output increases, more and more of the variable input must be used to produce each additional unit of output and since each unit of the variable input must be paid for, the cost per additional unit of output also rises)
(as output increases, more and more of the variable input must be used to produce each additional unit of output and since each unit of the variable input must be paid for, the cost per additional unit of output also rises)
question
What is the shape of the average total cost curve? Why?
answer
U-shaped because the AVC and AFC, which make up the ATC work in opposite directions, so when one increases, the other decreases and vice versa, giving the ATC curve a U-shape.
question
What is the shape of the average variable cost? Why?
answer
Upward sloping but flatter than the marginal cost curve- because of diminishing returns; as output increases, the more variable inputs are needed to produce, leading to higher AVC
question
What is the shape of the average fixed cost? Why?
answer
Downward sloping because of the spreading effect (as more output is produced, the fixed cost is divided by a greater number, so it just keeps getting smaller and smaller)
question
Why does the marginal cost curve slope downward at first? What does it hit a minimum then slope upward?
answer
it slopes downwards at first because increasing specialization leads to lower marginal costs when only a few workers are hired; as production continues and there are more workers, the benefits of specialization are exhausted, so diminishing returns set in and marginal cost increases, causing the curve to slope upward
question
Which curve could also be considered the demand curve?
answer
marginal revenue curve
question
Which curve could also be considered the supply curve?
answer
marginal cost curve
question
On an ATC curve, where is the long run and where is the short run?
answer
long run is where cost is decreasing and short run is where cost is increasing
question
If the AFC is not shown on a graph, but ATC and AVC are, how can you find the AFC?
answer
AFC = the vertical distance between the ATC and AVC at a given quantity (AFC is the gap between ATC and AVC)
question
Will the ATC and AVC ever touch? Why or why not?
answer
no because the AFC is in between them and the AFC will never be less than 0
question
What is the relationship between the MC curve and the MP curve?
answer
they are mirror images of each other; when MP increases, MC falls and vice versa
question
What is the long run average total cost curve?
answer
shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.
question
What are increasing returns to scale and where on the LRATCC are they?
answer
when long-run average total cost declines as output increases; where the curve is falling
question
What are constant returns to scale and where on the LRATCC are they?
answer
when long-run average total cost is constant as output increases; the curve's minimum point (neither falling nor rising)
question
What are decreasing returns to scale and where on the LRATCC are they?
answer
when long-run average total cost increases as output increases; where the curve is rising
question
What are economies of scale?
answer
when there are increasing returns to scale
question
What are diseconomies of scale?
answer
when there are decreasing returns to scale
question
What are sunk costs?
answer
a cost that has already been incurred and cannot be recovered; should be ignored in decision making
question
If a firm that has constant returns to scale decides to DOUBLE the number of resources, what will happen to the number of bikes it can produce?
answer
the number of bikes it can produce will double
question
If a that firm has increasing returns to scale decides to DOUBLE the number of resources, what will happen to the number of bikes it can produce?
answer
the number of bikes will more than double
question
If a firm that has decreasing returns to scale decides to DOUBLE the number of resources, what will happen to the number of bikes it can produce?
answer
the number of bikes will less than double
question
Why do economies of scale occur?
answer
because firms that produce more can better use Mass Production Techniques and Specialization.
question
What is long run ATC made up of?
answer
all the different short run ATC curves of various plant sizes.
question
If economic profit is negative, should the business continue doing what its doing?
answer
no, it could be and better off doing something else.
question
If economic profit is positive, should the business continue doing what its doing?
answer
yes
question
If economic profit is exactly zero, should a business keep doing what its doing?
answer
yes; it is making just enough to keep doing what its doing, it could not be better off utilizing its materials any other way
question
what do you eu=quite to determine the amount to produce?
answer
marginal cost and marginal revenue
question
Given a fixed amount of inputs, what happens when we add more inputs?
answer
decreasing marginal returns; marginal product decreases as more inputs are added
question
When output first increases with few workers, what causes this increase?
answer
specialization
question
What is the slope of the total cost curve?
answer
marginal cost
question
When a firm is producing zero output, what does total cost equal?
answer
fixed cost
question
T or F: Marginal cost is the change in variable cost generated by one additional unit of output
answer
true
question
T or F: The marginal cost curve must cross the minimum of the average total cost curve
answer
true
question
Why does the MC intersect the minimum of the ATC and AVC?
answer
because when marginal cost is below both curves, it pulls them down but when it is above them it pulls them up.
question
What does the shape of the MC tell us about incremental variable costs?
answer
they first decrease, then increase
question
When do firms tend to experience economies of scale?
answer
at low levels of production
question
When do firms tend to experience diseconomies of scale?
answer
at high levels of production
question
What is the shape of the short run average total cost curve?
answer
U shaped
question
The principle of marginal analysis states that every activity should continue until __________________ equals _________________
answer
marginal benefit; marginal cost
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