The Costs Of Production

Front 1

Explicit Costs

Back 1

costs that require an outlay of money buy the firm. These costs are things like rent, costs of manufacturing, etc.

Front 2

Implicit Costs

Back 2

costs that directly do not cost firm but economists consider. If 1k is spent on rent, that is 1k that is not incruing interest in a bank account. The interest lost is an implicit cost according to economists. Accountants do not take implicit costs into consideration

Front 3

Fixed Costs

Back 3

Costs that do not vary with the quantity of output produced. things that are fixed cost include rent

Front 4

Variable costs Definition

Back 4

costs that do vary with the quantity of output produced. like wages for employees, electricity to run machines, etc

Front 5

Total Costs Definition

Back 5

The market value of all the inputs that a firm uses in production. (TC=FC+VC)

Front 6

Average Fixed Costs Definition

Back 6

Fixed costs divided by the quantity of output AFC=FC/Q

Front 7

Average Variable Cost Definition

Back 7

Variable costs divided by quantity of output. AVC=VC/Q

Front 8

Average Total Cost Definition

Back 8

Total cost divided by the quantity of output. ATC=TC/Q

Front 9

Marginal Cost Definition

Back 9

The increase in total cost that arises from an extra unit of production. rise with the quantity of output produced. Change in total cost/ Change in Quantity.

Front 10

Average Fixed Costs graph

Back 10

decreases. at first rapidly, but then starts to level out as costs near $0

Front 11

Marginal Cost graph

Back 11

eventually rises with the quantity of output. Where it crosses the ATC, this point is known as a the minimun of average total cost

Front 12

Average Total Cost graph

Back 12

It is U shaped. AFC always declines as output rises because the fixed cost is getting spread over a larger number of units. AVC usually rises as output increases because of diminishing marginal product. Average total cost reflects the shapes of both AGC and AVC. At very low levels of output, ATC is high because the FC is spread out over a few units. ATC then delines as output increases until is reaches the minimum ATC (efficient scale). after that, the price increases because AVC increases substantially.

Front 13

Relationship between ATC and MC

Back 13

Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, ATC is rising.

Front 14

Where ATC meets MC

Back 14

this is the efficient scale. at this point, the firm's atc is at its lowest, so this is where the firm is most efficient.

Front 15

Economies of scale

Back 15

the property whereby long-run ATC falls as the quantity of output increases. for example, the larger a car plant gets, the more employees it can hire. This leads to specialization which leads to efficiency.

Front 16

Diseconomies of Scale

Back 16

the property whereby long-run average total cost rises as the quantity of output increases. For example, if a company grows too large, many managers will be streched to the limit, making them less efficient and allowing employees to be less efficient as a result of this inefficiency.

Front 17

Constant Returns to Scale

Back 17

the property whereby longrun ATC stays the same as the quantity of output changes.

Front 18

Total revenue

Back 18

the amount a firm receives for the sale of its output

Front 19

Total costs

Back 19

the amount that the firm pays to buy inputs.

Front 20

Profit

Back 20

total revenue minus total cost

Front 21

Cost of capital as an opportunity cost

Back 21

300k to open business. Cost is where 300k at 5% interest sitting in bank yields 15k a year. This 15k is a cost of capital.

Front 22

Economic Profit

Back 22

is the total revenue minus the total cost, including both explicit and implicit costs.

Front 23

Accounting profit

Back 23

firms total revenue minus only the explicit costs

Front 24

Prodution Function

Back 24

y= Q of Output
x= Q of inputs
starts at origin
gets flatter as the inputs increase, which reflects the diminishing marginal product

Front 25

Total-Cost curve

Back 25

y= total cost
x= Q of output
gets steeper as the Q of output increases because of diminishing marginal product
When the Q prod is large, the TC curve is relatively steep

Front 26

Marginal Product

Back 26

the increase in output that arises from an additional unit of input

Front 27

Diminishing marginal product

Back 27

the property whereby the marginal product of an input declines as the quantity of the input increases

Front 28

What is the relationship between a firms total revenue, profit, and total cost?

Back 28

Profit = Revenue - Total Cost

Front 29

Give an example of an opportunity cost that an accountant might not consider a cost. Why would an accountant ignore this cost?

Back 29

If you worked at a job that paid $10/hr, but there was a job that offered you $15/hr, an accountant would not take the $-5/hr as a cost of working at the $10/hr. They do not take implicit costs into account.

Front 30

What is marginal product and what does it mean if it is diminishing?

Back 30

Marginal product is the output one more unit of input can produce. After a time, inputs become so numerous that they are no longer considered beneficial. This decline in the benefit of inputs is known as the diminishing marginal product.

Front 31

Define total cost, average cost, and marginal cost. How are they related?

Back 31

Total Cost- cost of all inputs
Average cost- total cost/ Q of output
MArginal Cost- increase in total cost of one additional until of output

Front 32

How and why does a firms atc curve differ in the short run and the long run?

Back 32

How: The longrun ATC is a much flatter u-shape than the short run ATC. Shortrun lies on or above the longrun.
Why: Firms have greater flex. in the long run. In long run, firms get to choose short term curve it wants (ie, size of factory, number of machines, etc). In short run, they cannot change size of factory. In longrun, fixed costs become variable, where as in shortrun fixed means fixed.

Front 33

Define economies of scale/ diseconomies of scale and explain why they might arise.

Back 33

Economies of scale: longrun ATC decreases as output increases. ie. specialization of workers w/in firms
Diseconomies of Scale: Longterm ATC rises as out put rises. ie more employees= greater disorganization= less efficiency