question
What is production analysis?
answer
It focuses on the relationship between physical outputs and physical inputs
Q= Q(K,L)
Q= Q(K,L)
question
What is cost analysis?
answer
It examines the way in which dollar costs are affected by the output choices and input prices
C=C(Q,P inputs)
C=C(Q,P inputs)
question
sunk costs
answer
They are expenditures that have already been incurred and cannot be recovered
-associated with the purchase of highly specialized (firm-specific), assets, goods or services
-O.C = 0 , sunk costs are irrelevant to operating decisions or to forward looking decisions
- old technology = sunk costs
-associated with the purchase of highly specialized (firm-specific), assets, goods or services
-O.C = 0 , sunk costs are irrelevant to operating decisions or to forward looking decisions
- old technology = sunk costs
question
what conditions need to be satisfied to be considered sunk costs?
answer
1. cost has to be incurred
2. cannot be recovered
has to be at the same time
2. cannot be recovered
has to be at the same time
question
What is a sunk costs?
answer
the expenditure that you have paid and you can not recover
question
Are sunk costs relevant that are not incurred?
answer
yes, they are relevant since they result in entry barriers
- exit costs act as sunk costs that result in exit barriers
- exit costs act as sunk costs that result in exit barriers
question
The sunk cost effect
answer
produce an asymmetry between a firm that has already made a commitment to a technology and one that is planning such a commitment
question
Incumbent firms
answer
- may perfectly rationally choose NOT to invest in a new technology because its firm-specific assets & capabilities are less valuable when used with new technology
- they are sow to adopt new technology
- they are sow to adopt new technology
question
Total Cost
answer
- important but does not help with decision making.
- more output you produce, more TC you incurred
- more output you produce, more TC you incurred
question
Fixed costs
answer
- do not vary output
- LR; FC are avoidable
- Sr; they are not
- LR; FC are avoidable
- Sr; they are not
question
Variable costs
answer
- do not vary with output
TC(Q)= FC(Q) + VC(Q)
SR; TC= a +bQ. FC= a MC=b
TC(Q)= FC(Q) + VC(Q)
SR; TC= a +bQ. FC= a MC=b
question
Formulas
answer
ATC= TC/Q
AFC = FC/Q
AVC = VC/ Q
MC =^VC/^Q
AFC = FC/Q
AVC = VC/ Q
MC =^VC/^Q
question
AFC, AVC
answer
AFC decreases as quantity increases
AVC increases as quantity increases
AVC increases as quantity increases
question
Long-Run
answer
- no fixed costs
- feel free to expand capital
-Q must be larger than SR
- no constraints
- feel free to expand capital
-Q must be larger than SR
- no constraints
question
Economies of scale
answer
- may arise at the level of the activity, the plant or the firm
- arise from more efficient use of real resources
- the larger your company is more output you can produce
- large scale, produce a lot of Q = efficient
-very small AC
- increasing returns of scale
- managers want this
- BC Hydro ; natural monopoly
- arise from more efficient use of real resources
- the larger your company is more output you can produce
- large scale, produce a lot of Q = efficient
-very small AC
- increasing returns of scale
- managers want this
- BC Hydro ; natural monopoly
question
Sources of economies of scale
answer
1. specialization
2. Inventory
- manufacturing, huge investment, 1 time cost capital
3. cube-square
-costco; retail
- huge volume of storage, the square ft will be lower
-more revenue, low AC, more efficient
2. Inventory
- manufacturing, huge investment, 1 time cost capital
3. cube-square
-costco; retail
- huge volume of storage, the square ft will be lower
-more revenue, low AC, more efficient
question
Constant returns to scale
answer
- no economies of scale
- farmers; agriculture
- no manufacturing industries
- farmers; agriculture
- no manufacturing industries
question
minimum efficient scale (MES)
answer
Refers to the minimum plant or firm size at which economies of scale are exhausted
question
The learning curve or expenditure curve
answer
- charts unit cost reductions associated with higher cumulative output costs are associated with learning overtime & distinct from economies of scale
- shifts AC downward overtime
- shifts AC downward overtime
question
LAC curve
answer
- is below or at most SAC
- can always do better in decision making in LR
- can always do better in decision making in LR
question
What will happen to the LAC curve with factors?
answer
- changes in technology or in factor will shift the LAC curve and can affect industry structure if MES also changes
question
Economies of scope
answer
when the joint output of a single firm costs less than the sum of costs achieved by 2 different firms each producing a single product
question
transaction costs
answer
Coase
- market is not as perfect as we imagine
- merge together with the firm; significantly reduce transaction costs
- market is not as perfect as we imagine
- merge together with the firm; significantly reduce transaction costs
question
ATC curve
answer
- U-shaped
- when you increase your quantity, ATC decreases then increases
- minimized when MC=ATC
- when you increase your quantity, ATC decreases then increases
- minimized when MC=ATC
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