Exam 2 - ECON production

Economic Cost

1. The cost associated with the use of resources

2. The sum of explicit and implicit cost

Long Run total Cost curve GRAPH

see graph

Graphically, firms real LRATCC

See graph

Total Variable Cost Graph

see graph (orange line)

average fixed cost graph

see graph

Explicit Cost

The monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others

Another name for explicit cost

accounting cost

implicit cost

1. the opportunity cost of using owned resources

2. Costs for which no monetary payment is explicitly made

Accounting Profit

Total revenue minus the explicit costs of production

Economic Profit

Total revenue minus economic costs, which include both explicit and implicit costs of production

Accounting profit equation

total revenue - explicit costs

economic profit equation

Total revenue - economic costs

short run

the time period in which at least one input of production is fixed but other inputs can change

Total Product

1. the total amount of output with a given of resources

2. Equal to total output

Marginal Product

The additional output produced as a result of utilizing one more unit of a variable resource

MP Equation

Change in Total product / Change in variable resource

Average Product

1. The average amount of output produced per unit of a resource employed

2. Total product divided by the number of units of a resource employed

AP equation

total product / unit of resource

Increasing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the next previous variable resource

Diminishing Marginal Returns

A characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource

Fixed Cost

Cost that do not change with the amount of output produced

Variable Cost

Cost that change with the amount of output produced, increasing as production increases and decreasing as production decreases

Total Cost

The sum of fixed and variable cost of production

TC Equation

Total Fixed Cost + Total variable Cost

Average Fixed Cost

total fixed cost divided by the amount of output produced; fixed per unit

Average Variable Cost

total variable cost divided by the amount of output produced; variable cost per unit

Average Total Cost

Total Cost divided by the amount of output produced; total cost per unit

Marginal Cost

1. the additional cost associated with one more unit of an activity

2. For production, it is the change in total cost due to the production of one more unit of output

Average Cost Graph

see Graph:

Short-run Average Total Curve

a curve showing the average run for different level output when at least one input of production is fixed, typically plant capacity

Long Run

The time period in which all inputs of production can be changed

Long-Run Average Total Cost Curve (LRATC)

A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable

Economies of Scale

a condition on which the long-run average total cost of production decreases as production increases

Diseconomies of Scale

A condition in which the long-run average total cost of production increases as production increases

Constant Returns of Scale

A condition in which the long-run average total cost of production remains constant as production increases

Minimum Efficiency Scale

The lowest level output at which the long-run average total cost is minimized

What is an important in determining the true cost of an economic activity such as the production of goods and services

The factor of Implicit Cost

Total Revenue= ?

price of a good times the quantity sold

What business operating decisions should be based on?

the factor of economic profit

What does positive economic profit encourage?

More firms to enter the market to produce goods and services

When can a company can break even and meet operating cost without loss when it earn?

At ZERO economic profit

When is the value of economic profit negative?

When accounting profit is 0

If a business owner can produce more as a whole with an additional worker even if the marginal product associated with that worker is lower than the marginal product associated with the previous worker, then there are....

The factor of diminishing marginal

Graphically, the average product curve

Is increasing before reaching its peak, then decreasing

Why is it important to be able to calculate total product, average product, and marginal product?

To operate efficiently and maximize profit

If a company decided to produce zero units of output...

then it still has to pay fixed cost of production

Graphically, the fixed curve

perfectly horizontal

Graphically, the total variable curve

1. Is upward sloping

2. at each output level falls below the total cost curve by the amount of the fixed cost curve

The average total cost curve is...

greater than the average variable cost curve for all levels of output

what is important to calculate because it can be compared directly to the price?

Total cost and average cost

The vertical distance between the average variable cost and average total cost curves gets smaller as more output is produced because this distance is equal to the....

average fixed cost which declines as output increases

Patterns of the average fixed cost

always declined with additional output

pattens of average variable and total cost

always decline and then increase

What happens when marginal product increases?

marginal cost declines

How will a firm decide whether to keep production at the current level of output or produce more

compare the marginal cost and marginal benefit

What does the marginal cost curve show?

the relationship between: total cost and output

A profit-maximizing firm should produce a level of output where....

marginal revenue equals marginal cost

How is the long-run average total cost curve of a firm plotted?

by using the minimum short-run average cost for each level of output.

Diseconomies of scale example

A firm is reducing their output from 2,000 units to 1,000 units. This decision results in a reduction in the long run average cost from $300 to $200. What can be said about this firm?

Which of the following is a source of economies of scale for a firm?

An increase in the specialization of labor

What is a reason for diseconomies of scale exist for firms?

firms cannot perfectly replicate its production when it expands.