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33 Cards in this Set

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Explicit Costs
costs that require an outlay of money buy the firm. These costs are things like rent, costs of manufacturing, etc.
Implicit Costs
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
Fixed Costs
Costs that do not vary with the quantity of output produced. things that are fixed cost include rent
Variable costs Definition
costs that do vary with the quantity of output produced. like wages for employees, electricity to run machines, etc
Total Costs Definition
The market value of all the inputs that a firm uses in production. (TC=FC+VC)
Average Fixed Costs Definition
Fixed costs divided by the quantity of output AFC=FC/Q
Average Variable Cost Definition
Variable costs divided by quantity of output. AVC=VC/Q
Average Total Cost Definition
Total cost divided by the quantity of output. ATC=TC/Q
Marginal Cost Definition
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.
Average Fixed Costs graph
decreases. at first rapidly, but then starts to level out as costs near $0
Marginal Cost graph
eventually rises with the quantity of output. Where it crosses the ATC, this point is known as a the minimun of average total cost
Average Total Cost graph
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.
Relationship between ATC and MC
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.
Where ATC meets MC
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.
Economies of scale
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.
Diseconomies of Scale
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.
Constant Returns to Scale
the property whereby longrun ATC stays the same as the quantity of output changes.
Total revenue
the amount a firm receives for the sale of its output
Total costs
the amount that the firm pays to buy inputs.
Profit
total revenue minus total cost
Cost of capital as an opportunity cost
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.
Economic Profit
is the total revenue minus the total cost, including both explicit and implicit costs.
Accounting profit
firms total revenue minus only the explicit costs
Prodution Function
y= Q of Output
x= Q of inputs
starts at origin
gets flatter as the inputs increase, which reflects the diminishing marginal product
Total-Cost curve
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
Marginal Product
the increase in output that arises from an additional unit of input
Diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
What is the relationship between a firms total revenue, profit, and total cost?
Profit = Revenue - Total Cost
Give an example of an opportunity cost that an accountant might not consider a cost. Why would an accountant ignore this cost?
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.
What is marginal product and what does it mean if it is diminishing?
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.
Define total cost, average cost, and marginal cost. How are they related?
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
How and why does a firms atc curve differ in the short run and the long run?
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.
Define economies of scale/ diseconomies of scale and explain why they might arise.
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