ap economics: module 56 terms

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17 Terms

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t or f: in the LR, FC stays the same as it did in the SR

f; becomes a variable cost and can change

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relationship between FC and VC

trade-off; high FC and low VC or vice-versa

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how does a firm know what FC they should have?

when a firm has a desired output level it expects to maintain over time, it should choose the optimal FC for that level to minimize ATC

4
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long-run average total cost curve (LRATC)

shows the relationship between output and ATC when FC has been chosen to minimize ATC for each level of output

  • if there are many choices for FC → LRATC is a U shape

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when is a firm on its LRATC or SRATC?

when optimal FC for a level of output is chosen → LRATC

  • once output level alters → SRATC

  • needs to readjust FC for new level in order to go back to LRATC

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SRATC curves that minimize ATC @ some level of output will be where relative to the LRATC?

they will touch the LRATC at that same level of output

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what determines the slope of the LRATC?

the influence of scale on its LRATC of production

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scale

the size of a firm’s operations

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economies of scale

when LRATC declines as output increases

  • can result from increasing returns to scale

  • cheaper to produce more

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increasing returns to scale

when output increases more than in proportion to an increase in all inputs

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minimum efficient scale

the smallest quantity at which a firm’s LRATC is minimized

  • happens when economies of scale end and diseconomies of scale start

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diseconomies of scale

when LRATC increases as output increases

  • can result from decreasing returns to scale

  • more expensive to produce more

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decreasing returns to scale

when output increases less than in proportion to an increase in all inputs

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constant returns to scale

when output increases directly in proportion to an increase in all inputs

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what explains scale effects?

technology of production

  • economies of scale:

    • specialization that comes w/ a large scale of production → efficiency

    • happen from large initial setup cost → LRATC falls

  • diseconomies of scale

    • usually in large firms due to lack of communication and coordination

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IMPORTANT INFO

economies of scale induce firms to grow, but diseconomies of scale limit their size

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sunk cost

a cost that has already been incurred and is nonrecoverable; a cost that should be ignored in a decision about future actions

  • no influence on future costs and benefits