Econ Week 8 (production)

Diseconomies of Scale

A condition in which the long-run average total cost of production increases as production increases.

Constant Returns to Scale

A condition in which the long-run average total cost of production remains constant as production increases.

Which of the following scenarios does NOT illustrate a long-run adjustment? A)A local Starbucks hires two new employees. B)Three firms leave the retail clothing industry. C)Ten new vineyards are opened in the U.S. D)Honda Jet builds a new assembly plant in Greensboro, NC.

A local Starbucks hires two new employees.

Suppose that a business incurred explicit costs of $1.5 million and implicit costs of $300,000 last year. If the firm sold 4,500 units of its output at $450 per unit, its accounting profits were _______ and its economic profits were _______.

AP = 2,025,000 - 1,500,000 = 525,000 EP = 2,025,000 - 1,800,000 = 225,000

Explicit Costs

Monetary payments made by individuals, firms, and governments for the use of resources owned by others.

a difference between the short run and the long run?

Some resources are fixed in the short run and all resources are variable in the long run.

Average Total Costs

TC / Amt output produced

Average Fixed Costs

TFC divided by the amount of output produced.

economic profit

TR - economic costs (explicit + implicit)

Average Variable Costs

TVC / Amt output produced

Marginal Cost

The additional cost associated with 1 more unit of an activity.

The marginal cost curve crosses the:

average variable and average total cost curves at their lowest points.

Variable Costs

change with the amount of output produced, increasing as production increases and decreasing as production decreases. ex. labor

A firm is experiencing diseconomies of scale if:

costs increase as output expands.

Average fixed cost curve ....

declines continually as output expands

Fixed Costs

do not change with the amount of output produced ex. insurance, doesnt matter how much or how long you drive.. insurance is the same

economic cost =

explicit + implicit

Generally, accounting profits are _____ than economic profits, because accounting profits do not consider ____

higher implicit costs

when total product is rising, marginal product is

positive

Implicit Cost

The opportunity costs of using owned resources. ex. instead of using your building as a restaurant you could use it as a night club

total costs

The sum of fixed and variable costs of production.

long run

The time period in which all inputs of production can be changed.

short run

The time period in which at least one input of production is fixed but other inputs can be changed.

Total Product (TP)

The total amount of output produced with a given amount of resources.

Opportunity Cost

The value of the next-best foregone alternative.

accounting profit =

Total revenue - explicit costs

Increasing Marginal Returns

the MP of the next unit of a variable resource utilized is greater than that of the previous variable resource.

One reason a firm may experience economies of scale is:

the firm experienced specialization in labor and management.

Economies of Scale is a condition where

the long-run average total cost of production decreases as production increases.

Long-Run Average Total Cost Curve shows

the lowest ATC possible for any given level of output when all inputs of production are variable.

Diminishing Marginal Returns

the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource.

Average total cost is __________ divided by the number of units of output.

total cost

marginal product will

usually increase then decrease and often eventually becomes negative