Production
If you had $90,000 in explicit costs and $61,000 in implicit costs but sold 20,000 items at $10 each over the year, what was the: -Accounting profit -Economic profit
(Qty: 20,000 x $10 = $200,000) -Acct. Profit = $200,000 - $90,000 = $110,000 -Econ. Profit: =$200,000 - $151,000 = $49,000
Why is the average total cost split into two components?
-AVC is used to determine whether a firm should continue to operate or should shut down in the short run. -The constantly declining average fixed cost is apparent.
Which of the following is a way that firms can avoid paying fixed costs in the short run? -Firms can shut down and produce nothing -Firms can rely solely on salaried employees -Firms can increase output -Firms cannot avoid fixed costs in the short run
-Firms cannot avoid fixed costs in the short run
In making a decision about how much output it should produce to maximize its profits, which two pieces of information does a firm need? -The marginal product of the inputs -The fixed cost of the product -The cost per unit of the output -The extra cost associated with producing an additional unit of output -The extra benefit of producing that unit
-The extra cost associated with producing an additional unit of output (MC) -The extra benefit of producing that unit (Marginal revenue)
In addition to total cost, it is useful to calculate average cost because
-average cost can be compared directly to the price -average cost numbers are more usable for managing.
Economies of scale can result from a variety of factors, including: - better located markets -higher prices, resulting in higher profits -productivity gains from more specialized labor -lower costs of inputs as firms purchase larger quantities.
-productivity gains from more specialized labor -lower costs of inputs as firms purchase larger quantities.
Example of explicit costs
A bakery purchasing sugar that will be used to bake cakes
increasing marginal returns
A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource.
short run
A time period where at least one input of production is fixed but other inputs can be changed
When MC = AVC
AVC is constant
When MC < AVC
AVC is decreasing
When MC > AVC
AVC is increasing
fixed costs
Costs that do not vary with the quantity of output produced
marginal cost
Extra cost of producing one additional unit of production.
explicit costs (seen)
Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs. (AKA accounting costs)
total revenue
Price x Quantity
Marginal product (MP)
The additional output produced as a result of utilizing one more unit of a variable resource (i.e. labor or capital)
Average product (AP)
The average amount of output produced per unit of resource employed; total product / # of units
True or False: The shape of the average total cost curve can differ for any different types of firms
True
diminishing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.
economies of scale
a condition in which the long-run average total cost of production decreases as production increases
short run average total cost curve (ATC)
a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity
long-run average total cost curve (LRATC)
a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable
Explicit costs are also known as ________(accounting/opportunity) costs.
accounting
The fixed cost per unit is equal to:
average fixed cost
The vertical distance between the AVC and the ATC curves gets smaller as more output is produced, because this distance is equal to the
average fixed cost, which declines as output increases
Economic costs
costs associated with the use of resources; the sum of explicit and implicit costs
variable costs
costs that vary with the quantity of output produced; increasing as production increases, etc.
When the marginal product increases, the marginal cost of production
decreases
Positive _______________ profits encourage more firms to enter the market to produce goods and services
economic
Zero accounting profit means that the value of ________ profit is negative
economic
When marginal cost is less than average cost, average cost:
falls
Increasing marginal returns is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is __________(greater/smaller) than that of the previous variable resource.
greater
An opportunity cost is associated with any cost, whether it is an _______ cost or an _______ cost
implicit; explicit
One reason diseconomies of scale could exist is that
increasing opportunity costs
One potential reason diseconomies of scale could exist is that
inputs are not as productive as the inputs used before
If a company decides to produce zero units of output:
it still has to pay fixed costs of production
The ______-run average total cost curve relates to the _________-run average total cost curves for different plant configurations
long; short
minimum efficient scale
lowest level of output at which the long-run average total cost in minimized
economic costs
the costs associated with the use of resources; explicit costs + implicit costs
Implicit costs (unseen)
the opportunity costs of using owned resources; costs for which no monetary payment is explicitly made.
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
total costs
the sum of fixed and variable costs of production
long-run
the time period in which all inputs can be varied
Total product (TP)
the total amount of output produced with a given amount of resources Total Product = Total Output
average total cost
total cost divided by the quantity of output Average fixed cost + average variable cost
Average Fixed Cost (AFC)
total fixed costs divided by quantity of output; fixed cost per unit
economic profit
total revenue minus economic cost
accounting profit
total revenue minus total explicit cost.
Average Variable Cost (AVC)
total variable costs divided by quantity of output; variable cost per unit