The Costs of Production

Flashcards covering key concepts from the lecture on production costs.

What is total revenue?

The amount a firm receives for the sale of its output.

What is total cost?

The market value of the inputs a firm uses in production.

How is profit calculated?

Profit is calculated as total revenue minus total cost.

What is the difference between economic profit and accounting profit?

Economic profit accounts for both explicit and implicit costs, while accounting profit accounts only for explicit costs.

What are explicit costs?

Input costs that require an outlay of money by the firm.

What are implicit costs?

Input costs that do not require an outlay of money by the firm.

What is diminishing marginal product?

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

What do fixed costs refer to?

Costs that do not vary with the quantity of output produced.

What do variable costs refer to?

Costs that vary with the quantity of output produced.

What is average total cost?

Total cost divided by the quantity of output produced.

What shapes the average total cost curve?

The average total cost curve is U-shaped.

What happens to average total cost when marginal cost is less than average total cost?

Average total cost decreases.

What happens to average total cost when marginal cost is greater than average total cost?

Average total cost increases.

What characterizes economies of scale?

Long-run average total cost falls as the quantity of output increases.

How do short-run and long-run average total costs differ?

Short-run costs are fixed while long-run costs are variable.

What is marginal cost?

The increase in total cost that arises from an additional unit of production.

What is marginal product?

The increase in output that arises from an additional unit of input, such as labor.

What is efficient scale?

The quantity of output that minimizes average total cost.

What characterizes diseconomies of scale?

Long-run average total cost rises as the quantity of output increases.

What is a production function?

The relationship between the quantity of inputs used to make a good and the quantity of output of that good.

What is average fixed cost (AFC)?

Fixed costs divided by the quantity of output produced.

What is average variable cost (AVC)?

Variable costs divided by the quantity of output produced.

What characterizes constant returns to scale?

Long-run average total cost stays the same as the quantity of output increases.

When does the marginal cost curve intersect the average total cost curve?

At the efficient scale.

What is opportunity cost?

Whatever must be given up to obtain some item.

Why does the marginal cost curve typically rise?

Due to diminishing marginal product.

What happens to average variable cost when marginal cost is less than average variable cost?

Average variable cost decreases.

What happens to average variable cost when marginal cost is greater than average variable cost?

Average variable cost increases.

How are long-run average total cost curves typically formed?

They are a flatter U-shape than short-run average total cost curves and typically envelop the short-run curves.