question
What is a firm's goal?
answer
To maximize profit
question
What is a cash surplus?
answer
The company received $400,000 but their expenses are $230,000, therefore their cash surplus is $170,000.
question
What is depreciation?
answer
The fall in the value of a firm's capital. Accountants figure out how much something has depreciated and subtracts that from the cash surplus to find profit.
question
Why do accountants measure firms' profit?
answer
To be sure that the firm pays the right amount of income tax, and to show investors where the money is going.
question
Why do economists measure firms' profit?
answer
To enable them to predict the firms' decisions
question
What is economic profit equal to?
answer
Total Revenue Cost - Total Cost = Economic Profit
question
What is the opportunity cost of production?
answer
the value of the best alternative use of the resources that a firm uses in production
question
A firm's opportunity cost of production is the sum of the cost of using resources: (3)
answer
- Bought in the market
- Owned by the firm
- Supplied by the firm's owner
- Owned by the firm
- Supplied by the firm's owner
question
Why does a firm incur opportunity cost from resources bought in the market?
answer
Because the money spent on the resources they bought could've gone towards other resources.
question
Why does a firm incur opportunity cost from resources owned by the firm?
answer
The opportunity cost of a firm using its own capital is the option of selling it and renting from someone else. They are renting from themselves.
question
What is implicit rental rate?
answer
The opportunity cost that a firm incurs from using its own capital, basically renting from itself.
question
What are the 2 components of implicit rental rate?
answer
- Economic deprecation
- Forgone interest (opportunity cost)
- Forgone interest (opportunity cost)
question
How is a firm affected by resources supplied by the firm's owner?
answer
A firm's owner might supply both entrepreneurship and labour.
question
What is normal profit?
answer
The profit that an entrepreneur earns on average.
question
To achieve the objective of max economic profit, a firm must make 5 decisions:
answer
1. What to produce, and in what quantities.
2. How to produce.
3. How to organize and compensate its managers and workers.
4. How to market and price its products.
5. What to produce itself and buy from others.
question
Economic Accounting: A Summary
answer
- The short-run
- The long-run
- The long-run
question
What are the 2 decision timeframes?
answer
Fixed factors of production in the short-run.
Ex. Buildings, Equipment, etc.
Ex. Buildings, Equipment, etc.
question
What is plant?
answer
By changing the amount of labour.
question
How do firms usually change production in the short-run?
answer
Yes
question
Are short run decisions easily reversed?
answer
Plant can change in the long-run. With time, buildings, equipment, labour, everything can be changed and adjusted.
question
What can happen to plant in the long-run?
answer
No
question
Are long run decisions easily reversed?
answer
Sunk cost.
question
What do we call a past expenditure on plant that has no resale value?
answer
1. Total Product
2. Marginal Product
3. Average Product
2. Marginal Product
3. Average Product
question
What 3 concepts describe the relationship between production and the quantity of labour employed?
answer
The relationship between production concepts and amount of labour employed.
question
What do product schedules tell us?
answer
They graph the relationship between employment and the 3 production concepts, as well as the relationship between the 3 concepts.
question
What are product curves?
answer
Similar to the PPF, anything under is is attainable and over it is unattainable, only on the graph is efficient.
question
What is the total product curve?
answer
1. Increasing marginal returns initially
2. Diminishing marginal returns eventually
2. Diminishing marginal returns eventually
question
Almost every production process has 2 features:
answer
From the total product curve. As the labour increases by one on the TPC, take the data and create the MPC.
question
How do we create the marginal product curve?
answer
When the marginal product of an additional worker is less than the marginal product of the previous worker.
question
When do diminishing marginal returns occur?
answer
As a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.
question
The law of diminishing returns states that:
answer
increasing.
question
For the number of workers at which marginal product exceeds average product, average product is:
answer
decreasing.
question
For the number of workers at which marginal product is less that average product, average product is:
answer
...
question
Explain the relationship between average product and marginal product.
answer
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