Chapter 7- Production & Cost in the Firm

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Posted on

May 24th, 2023

question

Explicit Cost

answer

opportunity cost of resources employed by a firm that takes the form of cash payments (wages, rent, insurance, taxes, etc.)

question

Implicit Cost

answer

a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment (use of company owned building, owner's time)

question

Accounting Profit

answer

A firm's total revenue minus its explicit costs

question

Economic Profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Normal Profit

answer

a firm's accounting profit when all resources earn their opportunity cost; accounting profit equals implicit cost

question

Variable Resources

answer

any resource that can be varied in the short run to increase or decrease production (labor)

question

Fixed Resource

answer

any resource that cannot be varied in the short-run (size of building)

question

Short Run

answer

a period during which at least one of the firm's resources is fixed

question

Long Run

answer

a period during which all resources under the firm's control are variable

question

Total Product

answer

a firm's total output per period

question

Production Function

answer

the relationship between resources employed and a firm's total product

question

Marginal Product

answer

the change in total product when a particular resource increases by 1 unit, all other resources constant

question

Increasing Marginal Returns

answer

the marginal product of a variable resource increases as each additional unit of that resource is employed

question

Law of Diminishing Marginal Returns

answer

as more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

question

Fixed Cost

answer

any production cost that is independent of the firm's rate of output- doesn't vary with output

question

Variable Cost

answer

any production cost that changes as the rate of output changes

question

Total Cost

answer

the sum of fixed cost and variable cost, or TC= FC + VC

question

Marginal Cost

answer

the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output
MC= change in TC/ change in q

question

When marginal returns increase...

answer

marginal cost of output falls

question

When firm experiences diminishing marginal returns...

answer

marginal cost of output increases

question

Total Cost Curve

answer

sums fixed and variable, variable cost curve shifted vertically by fixed cost

question

Average Variable Cost

answer

variable cost divided by output
AVC= VC/q

question

Average Total Cost

answer

total cost divided by output, or sum of avg. fixed cost and avg. variable cost
ATC= TC/q
ATC= AFC + AVC

question

When marginal cost is above average cost...

answer

the average cost goes up

question

Economies of Scale

answer

forces that reduce a firm's average cost as the scale of operation expands in the long run

question

Diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

Long-run Average Cost Curve

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

question

Constant Long-Run Average Cost

answer

a condition that occurs if, over some range of output, long-run avg. cost neither increases nor decreases with changes in firm size

question

Minimum Efficient Scale

answer

The lowest rate of output at which a firm takes full advantage of economies of scale

question

The slope of total product of labor is...

answer

the same as the marginal product of labor curve
MPl= change in output/change in labor

question

Output can only be changed...

answer

in the short run by adjusting variable resources

1 of 31

question

Explicit Cost

answer

opportunity cost of resources employed by a firm that takes the form of cash payments (wages, rent, insurance, taxes, etc.)

question

Implicit Cost

answer

a firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment (use of company owned building, owner's time)

question

Accounting Profit

answer

A firm's total revenue minus its explicit costs

question

Economic Profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Normal Profit

answer

a firm's accounting profit when all resources earn their opportunity cost; accounting profit equals implicit cost

question

Variable Resources

answer

any resource that can be varied in the short run to increase or decrease production (labor)

question

Fixed Resource

answer

any resource that cannot be varied in the short-run (size of building)

question

Short Run

answer

a period during which at least one of the firm's resources is fixed

question

Long Run

answer

a period during which all resources under the firm's control are variable

question

Total Product

answer

a firm's total output per period

question

Production Function

answer

the relationship between resources employed and a firm's total product

question

Marginal Product

answer

the change in total product when a particular resource increases by 1 unit, all other resources constant

question

Increasing Marginal Returns

answer

the marginal product of a variable resource increases as each additional unit of that resource is employed

question

Law of Diminishing Marginal Returns

answer

as more of a variable resource is added to a given amount of other resources, marginal product eventually declines and could become negative

question

Fixed Cost

answer

any production cost that is independent of the firm's rate of output- doesn't vary with output

question

Variable Cost

answer

any production cost that changes as the rate of output changes

question

Total Cost

answer

the sum of fixed cost and variable cost, or TC= FC + VC

question

Marginal Cost

answer

the change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output
MC= change in TC/ change in q

question

When marginal returns increase...

answer

marginal cost of output falls

question

When firm experiences diminishing marginal returns...

answer

marginal cost of output increases

question

Total Cost Curve

answer

sums fixed and variable, variable cost curve shifted vertically by fixed cost

question

Average Variable Cost

answer

variable cost divided by output
AVC= VC/q

question

Average Total Cost

answer

total cost divided by output, or sum of avg. fixed cost and avg. variable cost
ATC= TC/q
ATC= AFC + AVC

question

When marginal cost is above average cost...

answer

the average cost goes up

question

Economies of Scale

answer

forces that reduce a firm's average cost as the scale of operation expands in the long run

question

Diseconomies of scale

answer

forces that may eventually increase a firm's average cost as the scale of operation increases in the long run

question

Long-run Average Cost Curve

answer

a curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

question

Constant Long-Run Average Cost

answer

a condition that occurs if, over some range of output, long-run avg. cost neither increases nor decreases with changes in firm size

question

Minimum Efficient Scale

answer

The lowest rate of output at which a firm takes full advantage of economies of scale

question

The slope of total product of labor is...

answer

the same as the marginal product of labor curve
MPl= change in output/change in labor

question

Output can only be changed...

answer

in the short run by adjusting variable resources

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