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16 Cards in this Set
- Front
- Back
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Opportunity Cost of Capital
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The return that the owners of the firm could earn if the value of the capital they own were invested in the next best alternative
*** Cost of owner supplied funds is an opportunity cost |
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Dividends
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direct payments by the firm to the stockholders
not considered opperating expenses |
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Retained earnings
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the funds remaining from total revenues after paying all operating expenses, income taxes and dividends
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The opportunity cost of labor
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wage or salary available to the employees of a firm in their next best employment alrternatives
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Total Cost curve
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represents total cost plus total opportunity cost
depicts the BEST POSSIBLE relationship between output and total cost depends on an efficient solution to how question points define the limit of a firm's production possibility |
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The Firm's economic problem
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objective: to produce the most output it can
constraint: it spends a given amount of money on factors of production Alternative: different combinations of factors of production that the given amount of money can buy |
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Solving the firm's economic problem
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1. total cost of purchasing any combination of factors of production
2. the maximum output attainable from any combination of those factors |
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The firm's production function
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the relationship between the factors of production and the maximum output attainable
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Total Cost equation
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TC= Pl xL + Pm x M + Pk X K
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The Firm's production function
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the relationship between a firms' out puts and inputs that indicates the maximum output available from all possible combinations of inputs that the firm might use.
indicates the maxium output attainable from all possible combinations of inputs, not just the factors of production the firm is currently using - summarizes all the output-input alternatives available to the firm |
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Ratio of marginal production to price
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MPl/ Pl= additional output divided by additional cost
The firm can only reach the total cost curve when it reaches a point where it can increase output only by increasing its total expenditures the firm should always substitute towards the factor with the higher output per dollar on the margin to obtain additional output at no cost |
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Least cost production rule
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1. equalize MP/f/ Pf across factors of production
2. if the ratios are unequal between two factors, substitute toward the factor with the higher ratio applies to both short run and long run |
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Economies of scale
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& change in TC/ % change in diseconomies of output is less than 1
low levels of output when the curve is bowed inward at the horizontal accsis |
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Diseconomies of scale
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% change in Total cost divided by the percent change in total quantity is greater than 1 - high levels of output-
point at which the curve bows outward away fro horixontal axis |
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Constant returns to scale
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if % change in total cost / by % change in quantity = 1
single point at which the bow changes direction |
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reasons for economies of scale
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economies of scale are likely to happen at low levels of output for a number of reasons:
1. as firms begin o produce they may need only to buy some more material inputs until output reaches a critical point- output increases yet costs hardly increase at all firms should still be able to experience some economies of scale as output continues to expand because of specialization or division of abor |
