Econ Exam Chapter 8

Economic Profit and Accounting Profit*

-Economic profit is the difference between total revenue and total cost, including both explicit and implicit costs -Accounting profit is the difference between total revenue and explicit costs -Economic profit (lower) motivates economic behavior.

Explicit and Implicit Cost*

-Explicit costs are incurred when an actual (monetary) payment is made -Implicit costs represent the value of resources used in production for which no actual payments are made.

Production and Costs in the Long Run*

-In the long run, because there are no fixed costs, variable costs equal total costs. -The long-run average total cost curve is the envelope of the short-run average total cost curves. It shows the lowest unit cost at which the firm can produce a given level of output. -If inputs are increased by some percentage and output increases by a greater percentage, then unit costs fall and economies of scale exist. If inputs are increased by some percentage and output increases by an equal percentage, then unit costs remain constant and constant returns to scale exist. If inputs are increased by some percentage and output increases by a smaller percentage, then unit costs rise and diseconomies of scale exist. -The minimum efficient scale is the lowest output level at which average total costs are minimized.

Residual Claimants

Persons who share in the profits of a business firm.

Shirking

The behavior of a worker who is putting forth less than the agreed-to effor

Marginal Physical Product (MPP)

The change in output that results from changing the variable input by one unit, holding all other inputs fixed.

Marginal Cost (MC)

The change in total cost that results from a change in output: MC = ΔTC/ΔQ

Diseconomies of Scale

The condition when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.

Constant Returns To Scale

The condition when inputs are increased by some percentage and output increases by an equal percentage, causing unit costs to remain constant.

Accounting Profit

The difference between total revenue and explicit costs.

Economic Profit

The difference between total revenue and total cost, including both explicit and implicit costs.

Profit

The difference between total revenue and total cost.

Minimum Efficient Scale

The lowest output level at which average total costs are minimized.

Market Coordination

The process in which individuals perform tasks, such as producing certain quantities of goods, based on changes in market forces, such as supply, demand, and price.

Managerial Consideration

The process in which managers direct employees to perform certain tasks.

Total Cost (TC)

The sum of fixed and variable costs.

Average Total Cost (ATC) (Unit Cost)

Total cost divided by quantity of output: ATC = TC/Q.

Average Fixed Cost (AFC)

Total fixed cost divided by quantity of output: AFC = TFC/Q.

Average Variable Cost (AVC)

Total variable cost divided by quantity of output: AVC = TVC/Q.

Average Marginal Rule

When the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude, the average magnitude falls.

Production and Costs in the Short Run*

-Short run: some inputs are fixed. -Costs associated with fixed and variable inputs are referred to as fixed costs and variable costs -Marginal cost is the change in total cost that results from a change in output -The law of diminishing marginal returns states that as ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline and marginal cost rises. -The average-marginal rule states that if the marginal magnitude is above (below) the average magnitude, the average magnitude rises (falls). -The marginal cost curve intersects the average variable cost curve at its lowest point. The marginal cost curve intersects the average total cost curve at its lowest point -There is no relationship between marginal cost and average fixed cost

The Firm*

-Sum of team production > Sum of individual production. - Negative aspect is shirking -Firms exist to reduce transaction costs

Sunk Costs*

-Sunk cost is a cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered. A person or firm that wants to minimize losses will hold sunk costs to be irrelevant to present decisions.

Sunk Cost

A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered.

Explicit Cost

A cost incurred when an actual (monetary) payment is made.

Implicit Cost

A cost that represents the value of resources used in production for which no actual (monetary) payment is made.

Long-run average total cost (LRATC) Curve

A curve that shows the lowest (unit) cost at which the firm can produce any given level of output.

Normal Profit (Zero Economic Profit)

A firm that earns normal profit is earning revenue equal to its total costs (explicit plus implicit costs); the level of profit necessary to keep resources employed in the firm.

Shifts in Cost Curves*

A firm's cost curves will shift if there is a change in taxes, input prices, or technology.

Long Run

A period of time in which all inputs in the production process can be varied (no inputs are fixed).

Short Run

A period of time in which some inputs in the production process are fixed.

Monitor

A person in a business firm who coordinates team production and reduces shirking.

Business Firm

An entity that employs factors of production (resources) to produce goods and services to be sold to consumers, other firms, or the government

Variable Input

An input whose quantity can be changed as output changes.

Fixed Input

An input whose quantity cannot be changed as output changes.

Law of Diminishing Marginal Returns

As ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline.

Fixed Costs

Costs that do not vary with output; the costs associated with fixed inputs.

Variable Costs

Costs that vary with output; the costs associated with variable inputs.

Economies of Scale

Economies that exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall.