Chapter 9: Businesses and the costs of production

Suppose a firm is producing in the long run. When it produces 2,000 units of output, its total cost is $4,000. When it produces 2,200 units of output, its total cost is $4,200, and when it produces 2,400 units of output, its total cost is $4,300.

This firm is experiencing INCREASING returns to scale.

What accounts for the stark contrast in the number of concrete plants and the number of aircraft manufacturing plants in the United States?

They have dramatically different minimum efficient scales.

Economies of scale explain the downward-sloping part of the ______ curve.

long-run average-total-cost

The resources a firm can easily and quickly adjust are....

hourly labor, raw materials, fuel, and power

Total cost

is the sum of total cost and total variable cost at each level of output

total product (TP)

is the total quantity, or total output, of a particular good or services produced.

MP first rises because the fixed capital gets used

more productively as added workers are employed.

Explicit costs are....

opportunity costs

Average product=

total product/units of labor

Fixed cost

Any cost that in total does not change when the firm changes its output.

What is meant by the phrase "spreading the overhead"?

As production increases, average fixed cost declines.

What methods can be used to calculate average total cost?

Average fixed cost plus average variable cost Total cost divided by output (Q)

Variable cost

A cost that increase when the firm increases it output and decreases when the firm reduces its output.

the following illustrates constant returns to scale

A firm's 10% increase in given inputs, causing a proportionate 10% increase in output

The following explains the concept of explicit costs...

A firm's monetary payments made for the use of resources owned by others. A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services.

Average total cost (ATC)

A firm's total cost divided by output (the quantity of product produced); equal to average fixed cost plus average variable cost.

Average fixed cost (AFC)

A firm's total fixed costs divided by output (the quantity of product produced).

Average variable cost (AVC)

A firm's total variable cost divided by output (the quantity of product produced).

Economic cost

A payment that must be made to obtain and retain the services of a resource; the income a firm must provide to a resource supplier to attract the resource away from an alternative use; equal to the quantity of other products that cannot be produced when resources are instead used to make a particular product.

Average fixed cost(AFC)=

AFC=TFC/Q

Average total cost (ATC)=

ATC=TC/Q = TFC/Q + TVC/Q= AFC+ AVC

Average variable cost (AVC) =

AVC= TVC/Q

By using economies of scale, successful start-up firms are able to shift their short-run cost curves in which directions?

Downward and to the right

Start-up firms achieve __________ of scale from learning by doing and through increased specialization of labor, management, and equipment.

Economies

Learning by doing contributes to a firm's ______.

Economies of Scale

What is another term for economies of scale?

Economies of mass production

The U-shape of the long-run average-total-cost curve results from which of the following?

Economies of scale Diseconomies of scale

Economic costs=

Explicit costs + Implicit costs

True or false: Important determinants of an industry's structure are economies of scale and revenue.

False Reason: Important determinants of an industry's structure are economies and diseconomies of scale.

Short run

In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.

long run

In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and no resources or costs are fixed.

Why does the law of diminishing returns not account for the U-shape of the long-run average-total-cost curve?

In the long run all resources and inputs are variable.

The following are examples of fixed costs?

Interest on a firm's debts Rental payments

How does labor specialization allow a worker to become more proficient?

It allows a worker to focus on fewer tasks and become more skilled in performing those tasks.

A firm grows from one to three plants. As a result, the firm's sales increase, leading to greater marketing expertise. This is an example of which of the following?

Learning by doing

Marginal cost(MC)

MC= Change in TC/ Change in Q

Marginal Cost (MC)

The extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and, in the short run, to the change in total variable cost divided by the change in output).

Marginal Product (MP)

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); equal to the change in total product divided by the change in the quantity of a resource employed.

marginal product

The additional output produced when 1 additional unit of a resource is employed (the quantity of all other resources employed remaining constant); is equal to the change in total product divided by the change in the quantity of a resource employed.

What is the effect of an increase in the price of labor on the ATC, AVC, and MC curves?

The average-variable-cost, average-total-cost, and marginal-cost curves shift upward. The average-fixed-cost curve remains the same.

How does minimum efficient scale factor into the number of aircraft concrete manufacturers in the United States?

The economies of scale for concrete manufacturing are exhausted before they grow very large. Aircraft manufacturing requires large economies of scale. Concrete manufacturing requires modest economies of scale. Concrete plants have a very limited distribution range.

Which of the following sections of a long-run average total cost curve depicts constant returns to scale?

The flat section

What determines the degree of the shift in a firm's AVC, MC, and ATC curves when gasoline prices increase?

The level to which gasoline is a major input cost for the firm.

What does the long-run average-total-cost curve show?

The lowest average total cost at which any chosen output level can be produced after the firm has had time to make adjustments in plant size

minimum efficient scale (MES)

The lowest level of output at which a firm can minimize long-run average total cost.

explicit costs

The monetary payments made by a firm to an outsider to obtain a resource

Law of diminishing returns

The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease.

Constant returns to scale

The situation in which a firms average total cost of producing a product remains unchanged in the long run as the firm varies the size of its plants (and, hence, its output).

economies of scale

The situation when a firm's average total cost of producing a product decreases in the long run as the firms increases the size of its plant (and, hence, its output).

average product (AP)

The total output produced per unit of a resource employed; equal to total product divided by the quantity of the employed resource.

How do increases in gasoline prices affect the AVC, MC, and ATC curves of most companies?

They all shift upward.

Marginal product=

change in total product/change in labor input

Total Variable Cost (TVC)

cost of the firm's variable factors

Accounting profit is what remains after a firm has paid its ______ costs.

explicit

"When marginal product is rising, marginal cost is falling. And when marginal product is diminishing, marginal cost is rising." This is because

higher marginal productivity lowers marginal costs.

The law of diminishing returns results in a

rise in short-run costs.

Increased labor ______ becomes more achievable as a plant increases in size.

specialization

implicit costs

the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment; includes a normal profit.

Total Fixed Cost (TFC)

the sum of the firm's fixed costs