AGEC ECON 2003 LSU Chapter 6
Terms in this set (85)
Costs that have been incurred when money is spent to hire labor, repair machinery, buy seed, fuel, or other things for which cash expenditures are made
A cost that has been incurred in using any resource for which there is not direct cash outlay during the period the resource was being used
Name two types of production cost:
Ex of Implicit Costs:
Depreciation costs of equipment such as tractors or other machinery
The cost borne by the producer when a resource that is currently being used for one activity is used in its next most valuable (profitable) activity. An opportunity cost is another type of implicit cost
Ex of Opportunity Cost
Examples include: interest made on money in the bank instead of invested in farming activities; land presently farmed for corn making $500/acre that could be farmed for wheat that would generate $300/acre. The $300 would be the opportunity cost for each acre to the farmer
Which cost represents true cost of production?
Revenues minus expenses
Economic (pure) Profit
Revenues minus explicit and implicit (opportunity) costs
Economic profit is what?
the amount by which the earnings exceed payment required to attract it to ( or keep it in) its present use
Costs that increase or decrease as output changes
Costs incurred for resources that do not change as output is changed
Length of Run
A planning concept that defines the level of flexibility in how resources (inputs) can be changed in the production process
Immediate short run
A span of time so short that no resources (input) changes can be made in the production process. All variables are considered fixed.
Ultimate Long Run
A span of time long enough that all resources (inputs) are considered variable. No inputs can be considered fixed in the ultimate long run.
Why do farmers face management decisions between long run and short run ?
Farmers face management decisions between the long run and short run where some inputs are fixed and others are variable.
Ex of Long run:
A farmer who has already planted a crop cannot change the amount of land he/she has planted (fixed input), but may vary the amount of fertilizer, pesticides, and irrigation (variable inputs) that are used.
Review Ch. 4- Found profit-maximizing level of inputs
one variable input allowed to vary, all other inputs fixed
Ch 5.- Found profit maximizing combination of two inputs to produce a given level of output
Two inputs allowed to vary, all other inputs fixed
Total Variable Costs (TVC)
Total spending for the variable input
Total Fixed Costs (TFC)
The total costs of all other inputs that do not change as output changes
Total Cost (TC)
Sum of total variable costs (TVC) and total fixed costs (TFC)
Total Revenue (TR)
Synonym of TVP in Ch. 5; calculated as price per unit of output multiplied by total output level.
Total revenue (TR) minus total costs (TC)
Average Variable Costs
Amount spent on the variable input per unit of output
Formula for Average Variable Costs
AVC = TVC/ Y ( Y represent the level of output for Ch. 6)
Average Fixed Cost (AFC)
The cost of fixed resources (inputs) per unit of output
Average Total Costs
Total costs of all the resources(inputs) used per unit of output produced.
Average Total Costs Formula
ATC= TC/Y or TVC= TFC/Y
The change in total cost when output is changed by one unit
Marginal Cost Formula
MC=TC /Y or TVC / Y (= "change in")(Can use either TC or TVC in numerator since TFC does not change as the level of output changes
Marginal Revenue (MR)
The amount added to total revenue when an additional unit of output is produced and sold
MR=TR/Y = Py (Py is the price of the output Y)
Ch. 4- TPP Curve has how many regions?
Name the TPP regions-
1% input increase results in a >1% output increase
1% input increase results in a <1% output increase
where incremental increases in input resulted in less output
What happens during the convex portion of the TPP curve?
The input is more productive in producing the output
What is the result of the convex portion of the TPP?
As a result, the marginal cost of producing an additional unit of output declines.
When does marginal costs stop declining ?
Marginal costs continue to decline until of reaches the end of the convex portion of the TPP curve, the point where MPP is maximized.
What is the end point of the convex portion called?
The "inflection point"
What happens during the Concave portion of the TPP curve?
The productivity of inputs being converted to outputs declines
What happens to marginal costs during the concave portion of the TPP curve?
The marginal costs of producing an additional unit of output in this area of the production function increases.
Theses costs continue to increase until the TPP is maximized (MPP=). At that point, the MC curve becomes vertical.
The AVC is minimized when?
At the same point in the production function where APP is maximized
How does AFC continue to decline?
As more output is added- minimum reached where TPP is maximized.
AtC minimized at some point past the point where AVC is minimized.
What is Profit maximizing Level of Output, and where can it be found?
Profit maximizing level of output is the optimum output level, it is found where marginal revenue is equal to marginal cost or MR=MC
MR & Plotting
MR is simply the price of the output, Y, we can plot this on the per unit cost graph to determine profit-maximizing level of output.
We can see how profit is maximized by what?
By evaluating total cost and total revenue
Short-Run Supply Curve of Firm
the firm will alter production as the output price changes to maximize profits.
What are some exceptions to the profit-maximizing point is where MR=MC?
The profit maximizing point is based on the relationships between the level of the output price, the ATC, and the AVC.
Short run supply curve of Firm, the output price Py is greater than what?
the minimum cost pint on the ATC curve at the point where MR=MC, then the firm is generating economic profit.
Occurs where the revenue made from selling the product exceeds both the explicit costs of the variable inputs used to produce the product and the implicit costs of the fixed inputs used to produce the product
What must happen for the firm to incur an economic loss?
The output price Py is less than the minimum cost point on the ATC curve but greater than the minimum point on the AVC curve at the point where MR=MC.
What can the firm do during economic loss?
at this price of the output, the firm can pay the variable costs of production but cannot completely cover the fixed costs of production
In economic loss what happens to the firm's produce?
The firm will continue to produce until the value of the fixed input (resource) is completely depreciated.
If the output price Py is less than minimum point on the AVC curve where where MR=MC, then the firm cannot what?
Pay for the variable costs of production
At this price of the output, what is the firm better of doing?
The firm is better off shutting down and simply incurring the costs associated with the sunk fixed costs rather than continuing to lose more money as more of the output is produced.
What is shutdown point?
The point where output price is equal to the AVC
Economic profits in the short run become a ____ for other potential producers.
What happens as more producer enter the market? Name them.
Two impact occur.
1. The price of the output declines as more output floods the market from additional producers and drives down price.
2. The price of the variable and fixed inputs increase as more producers "bid up" the price on inputs.
How does the effect of the downward pressure on the output price shift the MR curve ?
It shifts it downward
The effect of the upward pressure on input prices results in what ?
Results nan upward shift of the AVC, AFC, ATC, and MC curves.
What does the result of bothers shifts do?
Reduces the economic profits and can even eliminate them altogether.
Supply Curve (for the individual firm)
The amount of a good or service producers are wiling to offer for sale at different prices, ceteris paribus.
Graphically, occurs where the marginal cost curve equals different prices of the output, Py (i.e. different marginal revenue curves)
Where does the individual firm's supply curve start?
At the minimum of the AVC curve (shutdown point)
Market Supply Curve
The horizontal summation of all individual firm's supply curves for a product or commodity.
Describe Market supply curve graphically
It is the horizontal summation of all individual firm's marginal costs curves above their minimum AVC
How many changes in Market Supply?
Two types of changes in market supply.
Name the changes in Market supply.
Change in quantity supplied
Chang in supply
What is change in quantity supplied?
Movement along a supply curve that shows the changing levels of the product or commodity supplied given changes in the price of the product or commodity.
Quantity supplied continued
Analogous to movement along a demand curve when one has a change in quantity demanded in response to a change in the price of the good consumed.
What is change in supply?
A shift in the entire supply curve (supply schedule)
List factors shifting the supply curve
Good/bad growing conditions (ample, timely rain v. drought)
Improvement in production technology
Reduction/increase in input prices
Reduction/ increase in relative prices of other products or commodities
Changes in institutional constraints such as changes in acreage allotments under a farm program
Price elasticity of Supply
A measure of the percentage change in quantity supplied in response to a percent change in price, ceteris paribus.
How is price elasticity of supply calculated?
The same way as own price elasticity of demand
Formula for calculating price elasticity of supply
Es=(Q1-Q2)/(Q1+Q2) over (P1- P2)/ (P1+P2)
What does Q1 stand for?
Quantity of first observation
What does Q2 stand for?
Quantity of second observation
What does P1 stand for?
Price of first observation
What does P2 stand for?
Price of second observation
What does Es stand for?
Price Elasticity of Supply
For forms of Price Elasticity of Supply, What happens if the supply of a good is price inelastic?
For a 1 percent increase (decrease) in the price of the product, there is a LESS THAN 1 percent increase (decrease) in the quantity supplied of the product.
What happens if the supply of a good is price ELASTIC?
For 1 percent increase (decrease) in price, there is a GREATER than 1 percent increase (decrease) in quantity supplied of the product or commodity.