Production

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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


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