The Cost of Production

(2) Complete this sentence: "The production function represents maximum . . ." [13th edition, page 138; 12th edition, page 125; 11th edition: page 119]

-Technical efficiency, that is the most output attainable from any given level of factor inputs.

(16) On a graph, at what point does a firm's Marginal Cost curve intersect the firm's Average Total Cost curve? [13th edition, page 149; 12th edition, page 136; 11th edition: page 130]

-The ATC curve at its lowest point. -Point m

(15) Complete this sentence: "The output decision has to be based not only on . . ." [13th edition, page 149; 12th edition, page 135; 11th edition: page 129]

-The capacity to produce but also on the costs of production.

Profit

-The difference between total revenue and total cost.

(19) Complete this sentence: "Everyone agrees that profit represents . . ." [13th edition, page 166; 12th edition, page 152; 11th edition: page 144]

-The difference between total revenues and total costs.

Economic Profit

-The difference between total revenues and total economic costs.

Explicit Cost

-A payment made for the use of a resource.

(24) Complete this sentence: "The short run is characterized by . . ." [13th edition, page 152; 12th edition, page 139; 11th edition: page 133]

-By fixed costs.

(22) Complete this sentence: "In other words, economic profits represent . . ." [13th edition, page 168; 12th edition, page 154; 11th edition: page 146]

-Something over and above "normal profits".

(27) Explain why a larger firm might attain a lower minimum average total cost than a smaller firm. You're looking for three things that help to explain the greater efficiency of a large factory. [13th edition, page 155; 12th edition, page 142; 11th edition, page 136]

-They might to obtain cost advantages through specializations like having each worker become an expert at a particular skill. -They can reduce the cost. -They also can use learning by doing, which is the longer experience and larger volume of output may turn into a faster business.

(31) Explain why US workers have a tremendous advantage over foreign workers. [13th edition, page 156; 12th edition, page 143; 11th edition, page 137]

-They work with vast quantities of capital and state of the art technology. -They also come to the workplace with more education.

Average Total Cost

-Total cost divided by the quantity produced in a given time period.

Economies of Scale

-Reductions in minimum average costs that come about through increases in size of plant and equipment.

Factors of Production

-Resource inputs used to produce good and services, such as land, labor, capital, and entrepreneurship.

(25) Complete this sentence: "The long run cost curve is just a summary of . . ." [13th edition, page 152; 12th edition, page 139; 11th edition: page 133]

-Our best short-run cost possibilities, using existing technology and facilities.

Productivity

-Output per unit of input, for example, output per labor-hour.

Long Run

-A period of time long enough for all inputs to be varied.

Production Function

-A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.

(11) Why will an increase in output reduce a firm's average fixed cost (AFC)? [13th edition, pp 146 - 147; 12th edition, pp 133 - 134; 11th edition, pp 126 - 128]

-Any increase in output will lower average fixed costs.

(5) Why does diminishing returns to labor eventually begin in every production process? [13th edition, page 141; 12th edition, page 128; 11th edition, page 122]

-As more labor is hired, each unit of labor has less capital and land to work with.

(12) Why will the firm's average variable cost (AVC) eventually rise as output increases? [13th edition, page 147; 12th edition, page 134; 11th edition, page 128]

-Average variable cost rises because of diminishing return in the production process.

(28) Explain why increasing the size of a factory may actually reduce operating efficiency. You're trying to explain why "diseconomies of scale" exists! [13th edition, page 155; 12th edition, page 142; 11th edition, page 136]

-Because workers may feel small and not want to work as hard in such a large factory.

Fixed Cost

-Cost of production that don't change when the rate of output is change. -The cost of basic plant and equipment.

Variable Cost

-Costs of production that change when then rate of output is changed. -Labor and material costs.

(18) Under what condition will economic costs and accounting costs diverge? [13th edition, page 152; 12th edition, page 138; 11th edition, page 132]

-Economic and accounting costs will diverge whenever any factor of production is not paid an explicit wage.

(20) Which type(s) of cost will an accountant focus on? [13th edition, pp 166 - 168; 12th edition, pp 152 - 154; 11th edition: pp 144 - 146]

-Explicit cost

(3) Complete this sentence: "Hence, if jeans production isn't up to par, society is either . . ." [13th edition, pp 138 - 139; 12th edition, pp 125 - 126; 11th edition: pp 119 - 120]

-Getting fewer jeans than it should for the resources devoted to jeans production, or giving up too many other goods and services in order to get a desired quantity of jeans.

Unit Labor Cost

-Hourly wage rate divided by output per labor hour.

(21) Which type(s) of cost will an economist focus on? [13th edition, pp 166 - 168; 12th edition, pp 152 - 154; 11th edition: pp 144 - 146]

-Implicit

Constant Returns to Scale

-Increases in plant size do not affect minimum average cost.

(4) What is the short-run objective of the business owner? [13th edition, page 139; 12th edition, page 126; 11th edition, page 120]

-Is to make the best possible use of the factory we've acquired.

(29) Complete this sentence: "Labor is "cheap" only if . . ." [13th edition, page 156; 12th edition, page 143; 11th edition, page 137]

-It produces a lot of output in return for the wages paid.

(34) Explain how the Internet has been an important source of productivity gains in the last 10 years. [13th edition, page 157; 12th edition, pp 144 - 145; 11th edition, pp 138 - 139]

-Its potential really emerged with the creation of the world wide web in 1990. -It has helped businesses cut costs in many ways, =First by the cost of gathering information about markets has been reduced. =We can engage in greater specializations. =They can manage their inventories more efficient. =They help businesses reduce labor cost, 0.4 percent =Cut US production cost by 100-250 billion a year.

Marginal Physical Product

-MMP -The change in total output associated with one additional unit of input.

(17) Describe the relationship between average total cost (ATC) and marginal cost (MC). [13th edition, pp 149 - 151; 12th edition, pp 135 - 137; 11th edition, pp 129 - 132]

-Marginal cost refers to the change in total costs associated with one more unit of output. -Average total costs is simply total cost divided by the rate of output. -Average total costs decline as long as the marginal cost curve lies below the average cost curve. -Average total costs increase whenever marginal costs exceed average costs.

Techincal Efficiency

-Maximum output of a good from the resources used in production.

(6) What is the most desirable rate of output for a business owner to produce? [13th edition, page 141; 12th edition, page 128; 11th edition, page 122]

-One that maximizes total profit.

(23) Under what condition does a productive activity reap an economic profit? [13th edition, page 168; 12th edition, page 154; 11th edition: page 146]

-Only if it earns more than its opportunity cost.

(26) Explain what happens to the shape of the long-run cost curve when, in the real world, business owners confront an infinitely large number of scale choices. [13th edition, page 153; 12th edition, page 140; 11th edition: page 134]

-The effect of all these choices is to smooth out the long run cost curve. -Smooth U shape.

Marginal Cost

-The increase in total cost associated with a one unit increase in production.

(13) Why does a firm's average total cost (ATC) curve takes on a "capital letter U" shape? [13th edition, page 147; 12th edition, page 134; 11th edition, page 128]

-The initial dominance of falling AFC, combined with the later resurgence of rising AVC, is what gives the ATC curve its U shape.

Law of Diminishing Returns

-The marginal physical product of a variable input declines as more of it is employed with given quantity of other inputs.

Total Cost

-The market value of all resources used to produce a good or service.

Normal Profit

-The opportunity cost of capital; zero economic profit.

Short Run

-The period in which the quantity of some inputs can't be changed.

(1) Complete this sentence: "The dilemma of machine operators without sewing machines illustrates a general principle of production . . ." [13th edition, page 138; 12th edition, page 125; 11th edition: page 119]

-The productivity of any factor of production depends on the amount of other resources available to it.

(30) Complete this sentence: "A worker's productivity (MPP) depends on . . ." [13th edition, page 156; 12th edition, page 143; 11th edition, page 137]

-The quantity and quality of other resources in the production process.

Economic Cost

-The value of all reassures used to produce a good or service.

Implicit Cost

-The value of resources used, even when no payment is made.

(7) For a given firm, does maximum profit usually coincide with maximum output? Why or why not? [13th edition, pp 141 - 142; 12th edition, pp 128 - 129; 11th edition, pp 122 - 123]

-There is no reason to expect maximum profit to coincide with maximum output.

(10) Why is there a lower limit to a firm's Total Cost in the short run? As a part of your answer, be sure identify WHAT this lower limit is! [13th edition, page 145; 12th edition, pp 131 - 132; 11th edition, page 126]

-There is no way to avoid fixed costs in the short run.

(33) Explain how productivity advances impact global competitiveness. [13th edition, pp 156 - 157; 12th edition, page 143; 11th edition, pp 137 - 138]

-These advances keep shifting production up. -The cost of production is going down. -With these facts we can compete much more efficient with the rest of the world.

(9) Why is there is no upper limit to a firm's Total Cost in the short run? [13th edition, page 145; 12th edition, pp 131 - 132; 11th edition, page 126]

-They are fixed costs, they don't vary with the rate of output.

(14) Why is the minimum point on the ATC curve important? [13th edition, pp 147 - 148; 12th edition, page 134; 11th edition, page 128]

-This is what gives the ATC is U shape.

Average Fixed Cost

-Total fixed cost divided by the quantity produced in a given time period.

Average Variable Cost

-Total variable cost divided by the quantity produced in a given time period.

(32) Write down the formula used (blue type) to compute unit labor cost. [13th edition, page 156; 12th edition, page 143; 11th edition, page 137]

-UNIT LABOR COST= - wage rate/MPP(marginal physical product).

(8) What is the relationship between marginal physical product and marginal cost? Identify both "sides" of the relationship, please. [13th edition, page 143; 12th edition, page 130; 11th edition, page 124]

-When Marginal physical product is increasing, the marginal cost of producing a good must be falling. -If marginal physical product declines, marginal cost increases.