question
economic costs
answer
- explicit costs + implicit costs
- total opportunity cost
- total opportunity cost
question
explicit costs
answer
a cost that involves spending money
ex. wages
ex. wages
question
implicit costs
answer
- no payment involved
- uses self-owned resources
ex. value of owner's labor
- uses self-owned resources
ex. value of owner's labor
question
accounting profit
answer
total revenue - explicit costs
question
economic profit (pure profit)
answer
accounting profit - implicit cost
OR
total revenue - economic cost
OR
total revenue - economic cost
question
to determine profitability, proving _______ is more important than proving ______________
answer
economic profit, accounting profit
question
examples of implicit costs
answer
is foregone:
land -> rent
labor -> wages
capital -> interest
entrepreneurial ability -> entrep. income (normal profit)
land -> rent
labor -> wages
capital -> interest
entrepreneurial ability -> entrep. income (normal profit)
question
short run
answer
- can fix plant capacity and variable intensity of plant use
- fixed and variable costs
- doesn't refer to time
- refers to the amount of time to add additional inputs
ex. a sandwich shop calls its suppliers to ask for greater quantities of ingredients
- different ATC curve for each plant size
- fixed and variable costs
- doesn't refer to time
- refers to the amount of time to add additional inputs
ex. a sandwich shop calls its suppliers to ask for greater quantities of ingredients
- different ATC curve for each plant size
question
long run
answer
- no inputs are fixed / all variable costs
- variable plant capacity
- entry and exit is possible
- ATC is an envelope of several short run ATCs
- variable plant capacity
- entry and exit is possible
- ATC is an envelope of several short run ATCs
question
short run and long run is all relative to _____
answer
each respective market
ex. crude oil market has a 5 year constraint
ex. crude oil market has a 5 year constraint
question
total product (TP)
answer
total output of a product
question
average product (AP)
answer
total product / units of labor
question
marginal product (MP)
answer
change in total product / change in labor input
question
law of diminishing marginal returns
answer
- as successive units of a variable resource are added to a fixed resource, beyond some point the marginal product of the variable resource declines
- the more labor is added to land, at a certain point, there will be less and less marginal product
- short-run only b/c there long run only has variable costs
- the more labor is added to land, at a certain point, there will be less and less marginal product
- short-run only b/c there long run only has variable costs
question
average fixed cost (AFC)
answer
total fixed cost / total product
question
average variable cost (AVC)
answer
total variable cost / total product
question
average total cost (ATC)
answer
total costs / total product
question
marginal cost (MC)
answer
change in total cost / change in total product
question
short run production costs (graph)
answer
MC is below AVC
question
AVC will fall as long as...
answer
- resource price changes
- tech changes
- efficiency changes
- tech changes
- efficiency changes
question
cost curves shift if...
answer
MC rises
question
as MP decreases...
answer
shows the lowest (unit) cost at which the firm can be produced in the long run
question
LRATC curve
answer
factors that cause a producer's average cost per unit to fall as output rises / responsible for the downward sloping part of the LRATC curve
1. labor and managerial specialization
2. ability to use efficient capital goods
3. other factors (start-up costs, advertising costs, etc)
1. labor and managerial specialization
2. ability to use efficient capital goods
3. other factors (start-up costs, advertising costs, etc)
question
economies of scale
answer
responsible for the upward sloping part of the LRATC curve
1. coordination and communication problems
2. employee morale / alienation
1. coordination and communication problems
2. employee morale / alienation
question
diseconomies of scale
answer
- min. level of output required to achieve the lowest possible LRATC
- the shape of the LRATC determines the structure of industry (the number and size of typical firms in the industry)
- the shape of the LRATC determines the structure of industry (the number and size of typical firms in the industry)
question
minimum efficient scale of operations (MES)
answer
undefined
question
LRATC curve (one type)
answer
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