Chapter 8 - Production and Costs

question

Business Firm

answer

an entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government

question

Market Coordination

answer

the process in which individuals preform tasks, such as producing certain quantities of goods, on the basis of changes in market forces, such as supply, demand and price

question

Managerial Coordination

answer

the process in which managers direct employees to preform different tasks

question

Alchian-and-Demsetz Answer

answer

sum of team production > sum of individual production

question

Shirking

answer

the behavior of a worker who is putting forth less than the agreed-to effort

question

Monitor

answer

a person in a business firm who coordinates team production and reduces shirking

question

Residual Claimant

answer

persons who share in the profits of a business firm

question

In the theory of the firm, the exchanges take place at...

answer

1) at the level of individuals coming together to form a team

2) at the level of workers choosing a monitor

- low shirking (team without monitor)

- high shirking (team with monitor)

question

Profit =

answer

Total Revenue - Total Cost

question

Total Revenue =

answer

Price x Quantity

question

Explicit Cost

answer

a cost incurred when an actual (monetary) payment is made

question

Implicit Cost

answer

a cost that represents the value of resources used in production for which no actual (monetary) payment is made

question

Accounting Profit =

answer

Total revenue - explicit costs

question

Economic Profit =

answer

Total revenue - (explicit + implicit costs)

question

Normal Profit =

answer

zero economic profit

(the level of profit necessary to keep resources employed in a firm, a firm that earns normal profit is earning revenue equal to its total costs (explicit + implicit)

question

Fixed Input

answer

quantity cannot be changed as output changes (ex. monthly rent)

Fixed - capital

Variable - labor

question

Variable Input

answer

quantity can be changed as output changes (wood, nails, paint, etc.)

variable inputs - capital and labor

question

Short Run

answer

a period during which some inputs in the production process are fixed

question

Long Run

answer

a period during which all inputs in the process can be varied (no fixed inputs)

question

Marginal Physical Product (MPP)

answer

the change in output that results from changing the variable input by one unit, with all other inputs held fixed

question

Law of Diminishing Marginal Returns

answer

as ever larger amounts of a variable input are combined with fixed inputs, eventually the MPP of the variable input will decline

*this law holds only in the short run, when at least one input is fixed

question

MPP of Labor =

answer

Change in Q (output) / Change in L (labor)

question

Fixed Costs

answer

do no vary with output; costs are associated with fixed inputs

question

Variable Costs

answer

vary with output; costs are associated with variable inputs

question

Total Cost (TC) =

answer

TFC + TVC

question

Marginal Cost (MC) =

answer

Change in TC/Change in Q = wages/MPP

question

Relationship between MPP and MC

answer

- when MPP increases, MC decreases

- when MPP decreases, MC increases

question

Productivity or Average Physical Product

answer

AP of labor = change in Q (output)/change in L (labor)

question

Average Fixed Cost

answer

AFC = TFC/Q

question

Average Variable Cost

answer

AVC = TVC/Q

question

Average Total Cost

answer

TC/Q

AFC + AVC

question

Marginal Cost

answer

change in TC/change in Q

question

Average-Marginal Rule

answer

when the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude the average magnitude falls

Marginal > Average - Average falls

Marginal < Average - Average rises

question

Sunk Cost

answer

a cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered

question

Long-Run Average Total Cost Curve (LRATC)

answer

a curve that shows the lowest (unit) cost at which a firm can produce any given level of output

question

Economies of Scale

answer

percentage increase in output is greater than percentage increase in inputs

LRATC is falling

question

Diseconomies of Scale

answer

percentage increase in output is less than percentage increase in inputs

LRATC is rising

question

Constant Returns to Scale

answer

percentage increase in output is equal to percentage increase in inputs

LRATC is constant

question

Minimum Efficient Scale

answer

lowest output level at which ATC are minimized

question

Factors that shift cost curves

answer

1) change in taxes

2) input prices

3) technology

1 of 40

question

Business Firm

answer

an entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government

question

Market Coordination

answer

the process in which individuals preform tasks, such as producing certain quantities of goods, on the basis of changes in market forces, such as supply, demand and price

question

Managerial Coordination

answer

the process in which managers direct employees to preform different tasks

question

Alchian-and-Demsetz Answer

answer

sum of team production > sum of individual production

question

Shirking

answer

the behavior of a worker who is putting forth less than the agreed-to effort

question

Monitor

answer

a person in a business firm who coordinates team production and reduces shirking

question

Residual Claimant

answer

persons who share in the profits of a business firm

question

In the theory of the firm, the exchanges take place at...

answer

1) at the level of individuals coming together to form a team

2) at the level of workers choosing a monitor

- low shirking (team without monitor)

- high shirking (team with monitor)

question

Profit =

answer

Total Revenue - Total Cost

question

Total Revenue =

answer

Price x Quantity

question

Explicit Cost

answer

a cost incurred when an actual (monetary) payment is made

question

Implicit Cost

answer

a cost that represents the value of resources used in production for which no actual (monetary) payment is made

question

Accounting Profit =

answer

Total revenue - explicit costs

question

Economic Profit =

answer

Total revenue - (explicit + implicit costs)

question

Normal Profit =

answer

zero economic profit

(the level of profit necessary to keep resources employed in a firm, a firm that earns normal profit is earning revenue equal to its total costs (explicit + implicit)

question

Fixed Input

answer

quantity cannot be changed as output changes (ex. monthly rent)

Fixed - capital

Variable - labor

question

Variable Input

answer

quantity can be changed as output changes (wood, nails, paint, etc.)

variable inputs - capital and labor

question

Short Run

answer

a period during which some inputs in the production process are fixed

question

Long Run

answer

a period during which all inputs in the process can be varied (no fixed inputs)

question

Marginal Physical Product (MPP)

answer

the change in output that results from changing the variable input by one unit, with all other inputs held fixed

question

Law of Diminishing Marginal Returns

answer

as ever larger amounts of a variable input are combined with fixed inputs, eventually the MPP of the variable input will decline

*this law holds only in the short run, when at least one input is fixed

question

MPP of Labor =

answer

Change in Q (output) / Change in L (labor)

question

Fixed Costs

answer

do no vary with output; costs are associated with fixed inputs

question

Variable Costs

answer

vary with output; costs are associated with variable inputs

question

Total Cost (TC) =

answer

TFC + TVC

question

Marginal Cost (MC) =

answer

Change in TC/Change in Q = wages/MPP

question

Relationship between MPP and MC

answer

- when MPP increases, MC decreases

- when MPP decreases, MC increases

question

Productivity or Average Physical Product

answer

AP of labor = change in Q (output)/change in L (labor)

question

Average Fixed Cost

answer

AFC = TFC/Q

question

Average Variable Cost

answer

AVC = TVC/Q

question

Average Total Cost

answer

TC/Q

AFC + AVC

question

Marginal Cost

answer

change in TC/change in Q

question

Average-Marginal Rule

answer

when the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude the average magnitude falls

Marginal > Average - Average falls

Marginal < Average - Average rises

question

Sunk Cost

answer

a cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered

question

Long-Run Average Total Cost Curve (LRATC)

answer

a curve that shows the lowest (unit) cost at which a firm can produce any given level of output

question

Economies of Scale

answer

percentage increase in output is greater than percentage increase in inputs

LRATC is falling

question

Diseconomies of Scale

answer

percentage increase in output is less than percentage increase in inputs

LRATC is rising

question

Constant Returns to Scale

answer

percentage increase in output is equal to percentage increase in inputs

LRATC is constant

question

Minimum Efficient Scale

answer

lowest output level at which ATC are minimized

question

Factors that shift cost curves

answer

1) change in taxes

2) input prices

3) technology

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Chapter 8 – Production and Costs

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