question
economic cost
answer
payment that must be made to obtain and retain the services of a resource
question
explicit cost
answer
monetary payments it makes to those from whom it must purchase resources it does not own
why is it opportunity cost?-forgoes best alternatives that could have been purchased with the money
why is it opportunity cost?-forgoes best alternatives that could have been purchased with the money
question
implicit cost
answer
opportunity costs of using the resources that it already owns rather than selling them for cash
question
accounting profit
answer
revenue - explicit costs (explicit costs only)
question
normal profit
answer
the typical amount of accounting profit that you would most likely have earned in one of these other ventures
question
economic profit
answer
revenue - explicit costs - implicit costs (both ec and ic)
-threshold at $0=doing as well in their current business as they would in alternative business
-threshold at $0=doing as well in their current business as they would in alternative business
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plant capacity
answer
capital resources
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short run (fixed plant)
answer
period too short for a firm to alter its plant capacity (capital resources)
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long run (variable plant)
answer
period long enough for it to adjust the quantities of all the resources that it employs (long enough to enter or leave the industry)
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total product
answer
total output produced by the firm
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marginal product
answer
The extra output or added product associated with adding a unit of a variable resource
question
marginal product formula
answer
change in total product/change total labor
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average product
answer
total product/units of labor
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law of dimishing returns
answer
assumes that all units of labor are of equal quantity
-if too many variable resources are added to the fixed resource then the marginal product will decline
-if too many variable resources are added to the fixed resource then the marginal product will decline
question
short run production costs
answer
fixed costs (TFC): costs that do not vary with output.
variable costs (TVC): costs that do vary with output.
total cost (TC): sum of TFC and TVC.
variable costs (TVC): costs that do vary with output.
total cost (TC): sum of TFC and TVC.
question
total cost
answer
TFC + TVC
question
average fixed cost
answer
TFC/quantity
-indirect relationship
-indirect relationship
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Average Variable Cost (AVC)
answer
TVC/Q
-when average product maximum, avc is at minimum
-indirect relationship
-when average product maximum, avc is at minimum
-indirect relationship
question
average total cost
answer
AFC + AVC
or tc/q
or tc/q
question
marginal cost formula
answer
subtract the TC columns from each other
question
marginal cost
answer
-change in costs when one more or one less unit of output is produced
-not fixed costs
-the more product is made the lower the price
-atc and mc have a direct relationship
-not fixed costs
-the more product is made the lower the price
-atc and mc have a direct relationship
question
marginal decisions
answer
decisions to produce a few more or a few less units
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the long run cost curve
answer
-shape comes from economies then diseconomies
-red curves (short ones)=short run ATC curves of various plant sizes
-red curves (short ones)=short run ATC curves of various plant sizes
question
economies of scale
answer
-declining ATC, output increasing
-labor and managerial specialization and efficient capital
-labor and managerial specialization and efficient capital
question
diseconomies of scale
answer
the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer
-communication problems
-uncoordinated decisions
rising atc
-high level of output
-communication problems
-uncoordinated decisions
rising atc
-high level of output
question
constant returns to scale
answer
long-run average cost doesn't change
constant ATC
constant ATC
question
minimum efficient scale (MES)
answer
lowest level of output at which a firm can minimize long-run average costs
question
natural monopoly
answer
a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service
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