Econ 201 Chapter 7

How do we calculate marginal product?

Change in a firm's output when it employees more labor; mathematically, MP=ΔTP/ΔL

What are diminishing marginal returns as they relate to costs?

Diminishing marginal returns describe the reduced productivity that comes from employing additional workers or capital. Since additional workers have lower productivity, it takes more workers to raise the same quantity of output that fewer workers did before. Thus, diminishing marginal returns lead to an increase in marginal costs.

Would you consider an interest payment on a loan to a firm an explicit or implicit cost?

Explicit

What is a variable input?

Factors of production that a firm can easily increase or decrease in a short period of time

What is a fixed input?

Factors of production that can't be easily increased or decreased in a short period of time

Why will firms in most markets be located at or close to the bottom of the long-run average cost curve?

Firms in most markets are located close or at the bottom of the long-run average cost curve. This is because the minimum point of a long run average cost curve represents an efficient level of output. If firm produce more or less than this level, then the firm would face higher average cost and he will be unable to compete in the market.

What shapes would you generally expect fixed costs curves to have?

Flat horizontal line

What shapes would you generally expect a total product curve to have?

Gradually going up

What are implicit costs?

Implicit costs are more subtle, but just as important. They represent the opportunity cost of using resources that the firm already owns. Often for small businesses, they are resources that the owners contribute. For example, working in the business while not earning a formal salary, or using the ground floor of a home as a retail store are both implicit costs. Implicit costs also include the depreciation of goods, materials, and equipment that are necessary for a company to operate.

What is the difference between accounting and economic profit?

It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. Economic profit is total revenue minus total cost, including both explicit and implicit costs. The difference is important because even though a business pays income taxes based on its accounting profit, whether or not it is economically successful depends on its economic profit.

What is a production function?

Mathematical equation that tells how much output a firm can produce with given amounts of the inputs

Are there fixed costs in the long-run? Explain briefly.

No, there are not fixed costs in the long run because buildings could expire, aging technology, employees getting older.

What are explicit costs?

Out-of-pocket costs, that is, actual payments. Wages that a firm pays its employees or rent that a firm pays for its office are explicit costs.

What is a long-run average cost curve?

Shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology.

What shapes would you generally expect variable cost curves to have?

Up, horizontal, then up

What shapes would you generally expect a marginal product curve to have?

Upside down U shape

What shapes would you generally expect marginal cost curves to have?

checkmark

What is constant returns to scale?

expanding all inputs proportionately does not change the average cost of production

What shapes would you generally expect average variable cost curves to have?

stretched out check mark

What shapes would you generally expect average total cost curves to have?

stretched out checkmark

What is economies of scale?

the long-run average cost of producing output decreases as total output increases

What is diseconomies of scale?

the long-run average of producing output decreases as total output increases