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ECON Ch. 12 - Costs of Production
Terms in this set (59)
costs that require an outlay of money by the firm
costs that do not require an outlay of money by the firm
costs that do not vary with the quantity of output produced (FC)
costs that vary with the quantity of output produced (VC)
the market value of all the inputs that a firm uses in production
TC = FC + VC
average fixed cost
fixed cost divided by the quantity of output
AFC = FC / Q
average variable cost
variable cost divided by the quantity of output
AVC = VC / Q
average total cost
tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced; whenever marginal cost is less than ATC, ATC is falling, and whenever MC is greater than ATC, ATC is rising; total cost divided by the quantity of output
ATC = TC / Q
the increase in total cost that arises from an extra unit of production; the amount by which total cost rises if output increases by one unit
MC = change in TC / change in Q
"change in:" delta
a firm is producing 20 units with an avg. total cost of $25 and a marginal cost of $15. if the firm increased production by one unit, what must occur and why?
average total cost ATC must decrease; whenever marginal cost is less than average total cost, avg. total cost is falling
if a licensing fee is imposed, a shift in which two cost curves occurs?
since a license fee is an example of a fixed cost (a cost which does not vary with the level of output), both avg. total cost and avg. fixed cost shift; these two both include fixed costs in their calculations
a firm's cost curves alone ___ tell us what decisions firms will make
the goal of firms is to maximize ___
profit equals ___
total revenue minus total cost
some opportunity costs of production are explicit, such as ___
the wages a firm pays its workers
some opportunity costs of production are implicit, such as ___
the wages a firm owner gives up by working at the firm rather than taking another job
accounting profit considers ___
economic profit considers ___
both explicit and implicit costs
as quantity of an input increases, what happens to a typical firm's production function?
production function gets flatter, displaying the property of diminishing marginal product
as quantity of an input decreases, what happens to a typical firm's production function?
production function gets steeper
which related measures of cost are derived from a firm's total cost?
average total cost and marginal cost
for a typical firm, marginal cost rises with ___. average total cost first ___ as output increases and then ___ as output increases further
the quantity of output
where does the marginal-cost curve cross the average total cost curve?
at the minimum of average total cost
a firm's costs often depend on the ___ considered; many costs are ___ in the short run but ___ in the long run
due to how firm's costs depend on the time horizon considered, when the firm changes its levels of production, average total cost may ___
rise more in the short run than the long run
the amount a firm receives for the sale of its output
economic profit (in terms of a formula)
total revenue minus total cost, including both explicit and implicit costs
accounting profit (in terms of a formula)
total revenue minus explicit cost
the relationship between quantity of inputs (WORKERS) used to make a good and the quantity of output of that good
in terms of the production function, as output increases, so must ___
the quantity of workers
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 output increases; as the inputs to production increase, the marginal product declines, causing the production function to get flatter as output increases, which also means that each subsequent increase in quantity requires a larger increase in inputs, causing total cost to rise (become steeper) at an increasing rate
diminishing marginal product explains why, as a firm's output increases, ___ (in terms of effects on production function and total cost curve)
the production function get FLATTER and the total cost curve gets STEEPER
the quantity of output that minimizes average total cost
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
diseconomies of scale
the property whereby long run average total cost rises as the quantity of output increases
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
describe the shape of the production function graph (x-axis: number of workers hired, y-axis: quantity of output)
production function gets flatter as the number of workers increases, reflecting diminishing marginal product
describe the shape of the total-cost curve (x-axis: total cost, y-axis: quantity of output)
the total-cost curve gets steeper as the quantity of output increases because of diminishing marginal product
which three features of ATC, AFC, AVC, and MC are typical of many firms?
1. marginal cost rises with the quantity of output (shape of marginal cost curve)
2. the average total cost curve is U-shaped (shape of average total cost curve)
3. the marginal cost curve crosses the average total cost curve at the minimum of average total cost (relationship between marginal and average total cost)
the bottom of the U-shape of the average total cost curve occurs at the quantity that minimizes average total cost. this quantity is sometimes called ___
the efficient scale of the firm
whenever marginal cost is less than average total cost, average total cost is ___
whenever marginal cost is greater than average total cost, average total cost is ___
at low levels of output, marginal cost is ___ average total cost, so average total cost is ___
after the two curves cross (avg. total cost and marg. cost), marginal cost ___ average total cost
the long-run avg. total cost curve is ___ than the short-run avg. total cost curve
a much flatter U-shape
where do the short-run curves lie in terms of the long-run curve?
they lie on or above the long-run curve
firms have less or more flexibility in the long run?
which short-run curve does a firm have to use? what is this decision based on?
in the long-run, firm gets to choose which short run curve it wants to use, but in the short-run, it has to use whatever short-run curve is has
how long does it take a firm to "get in the long-run?"
the answer depends on a firm. a major manufacturing firm would take one year or more, while a person running a coffee shop can buy another coffee maker within a few days
what might cause economies of sale?
economies of scale often arise when higher production levels allow specialization among workers, which allows workers to become better at a specific task
what might cause diseconomies of sale?
can arise because of coordination problems that are inherent in any large organization. when a management team is stretched out (as more is produced), managers become less effective at keeping costs down
why is the long-run average total cost curve often U-shaped?
it is falling at low levels of production due to increasing specialization and rising at high levels of production because of the increasing prevalence of coordination problems
when measuring costs at any firm, which principle of the Ten Principles of Economics is important to keep in mind?
the cost of something is what you give up to get it (opportunity cost). therefore, a firm's cost of production must include all the opportunity costs of making its output of goods and services
an economist views a firm how?
revenue = economic profit, implicit costs, and explicit costs
total opportunity costs = implicit and explicit costs
an accountant views a firm how?
revenue = accounting profit and explicit costs
a lump-sum tax causes an increase in fixed cost. therefore, which cost curves change?
increase: avg. fixed cost, avg. total cost
stays the same: avg. variable cost, marginal cost
a per-unit tax increases ___ at an increasing rate
a per-unit tax results in changes to which cost curves?
increase: avg. variable cost, avg. total cost, and marginal cost
stays the same: avg. fixed cost
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