Chapter 14-Production and Cost

When graphing a conventional short-run production function, we place __________ on the horizontal axis and __________ on the vertical axis.

the variable input, output

What does the word "cost" refer to?

the word "cost" refers to the amount it costs the company to produce the item (Cost of production).

The relationship between the inputs used by the firm and the maximum output it can produce is known as the:

production function

The downward sloping part of the long run average total cost curve is where the firm is achieving:

economies of scale

What is a firm's goal?

maximize profit

Total variable cost (TVC)

is the cost any factor of production that varies with output. Ex: Labor, Utilities, Materials The more a company produces, the more of these resources they need, which will raise their Total Variable Cost. TC = TFC + TVC

Marginal Cost

A firm's marginal cost is the change in total cost that results from a one-unit increase in production. This essentially tells the company how much more it will cost them if they decide to make one more of the item.

short run production

A lot of our decisions moving forward will require us to consider the option to change current production levels to analyze effects on cost of production. To do that we will use Marginal Product Marginal product is the change in total product that results from a one-unit increase in the quantity of labor employed. •The contribution to total product of adding one more worker.

Cost Curves

ATC (average total cost), AFC (average fixed costs), AVC (average variable costs), MC (marginal cost)

Accounting Profit

Acct. Profit = Total Revenue - Explicit Costs

What is an implicit cost?

An implicit cost is an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment. •Ex. the cost of using the firm owner's resources, such as labor. Ex:The owner could have been working another job making money. If they quit that job to start their own company, an implicit cost is the sacrificed income. They don't pay it, but it still needs to be considered as a cost of running the business

law of decreasing returns

As a firm uses more of a variable input (labor), with a given quantity of fixed inputs (space to use), the marginal product of the variable input (labor) eventually decreases

If the number of people in a publishing company does not go up or down with the quantity of books it publishes, then how should we categorize the salaries and benefits paid to these employees?

As a part of fixed cost

Constant Returns to Scale

Constant returns to scale exist if ATC remains constant as a firm increases production

Diseconomies of Scale

Diseconomies of scale exist if a firm see ATC rising as they increase production. Typically caused by management issues.

What is the name for the additional output that a firm produces as a result of hiring one more worker?

Marginal product of labor

Which of the following is known as the highest-valued alternative that must be given up in order to engage in an activity?

Opportunity cost

Total Cost Formula

TC = TFC + TVC Total Fixed Cost + Total Variable Cost

The Short Run: Fixed Plant

The short run is a time period in which the quantities of some resources are fixed. •Physical Capital is fixed •Labor usage can vary •Example: A pizza restaurant has signed a 2 year lease to rent out a building. For 2 years, the are agreeing to use that space. They can change any other resource as needed, but it must make do with the space they are renting out.

Average Cost

There are three average cost concepts: Average fixed cost (AFC) is total fixed cost per unit of output. Average variable cost (AVC) is total variable cost per unit of output. Average total cost (ATC) is total cost per unit of output.

Short Run Costs

To produce more output in the short run, a firm employs more labor, which means the firm must increase its costs. We describe the relationship between output and cost using three cost concepts: •Total cost •Marginal cost •Average cost

Total Product

Total product (TP) is the total quantity of a good produced in a given period. •increases as the quantity of labor increases.

Which of these costs are affected by the level of output produced?

Variable costs

When the marginal product of labor is greater than the average product of labor, then the average product of labor must be

increasing

economic profit

Econ. Profit = Total Revenue - (Explicit + Implicit Costs) A firm's economic profit equals total revenue minus total cost, when... Total cost = explicit costs + implicit costs

The long run average cost curve can be divided up into 3 different portions. What are they?

Economies of Scale, Constant Returns to Scale, and Diseconomies of Scale

Economies of Scale

Economies of scale exists when ATC decreases as a firm increases production. Typically caused by increased technology and specialization.

Which of the following are sometimes called accounting costs?

Explicit

In the short-run, the cost that is independent of the amount of output produced is called

Fixed cost

The Long Run: Variable Plant

The long run is a time period in which the quantities of all resources can be changed. Example: Think of this as having a month to month lease. You can change anything you want with the business. If you need more space, go find a location that is larger... Moving forward, assume we are dealing with a short-run situation.

The Long-Run Average Cost Curve

The long-run average cost curve shows the lowest average cost at which it is possible to produce each output when the firm has had sufficient time to change all factors of production.

The short run is a period of time where __________ while the long run is a period of time where

at least one input is fixed, all inputs are variable

What is an explicit cost?

is an expense that must be physically paid for. Ex.: Wages, Utility Bills, Rent, any materials needed

Total Cost

A cost can be categorized two ways: Total fixed cost (TFC) is the cost of a firm's fixed factors of production. Ex: Rent, Loan Repayments, etc. A Fixed Cost is a constant expense regardless of how much output is being manufactured.

Minimum efficient scale is the level of output at which:

all economies of scale have been exhausted Output beyond this point will not lower long-run average cost. Graphically this is the point where the curve ceases to fall and typically flattens out at this point to generate constant returns to scale.

Profit

total revenue minus total cost