Business Economics Quiz

Chapter 6: A Firm's Production Decisions and Costs in the Short Run

• This chapter explores a firm's production decisions and costs in a short-run context.
• Firms are defined as business organizations that hire and organize production factors to sell goods and services.
• Different types of business organizations exist, such as sole proprietorships, partnerships, corporations, state-owned enterprises, and non-profit organizations.
• Production is the activity of a business using inputs (e.g., sand, gravel, cement, water, machinery, and labor) to achieve output (e.g., concrete). Costs represent the payments for these inputs.

Learning Objectives

• Explain what a firm is and list different firm types.
• Describe how economists and accountants measure costs differently and differentiate between their profit views.
• Explain the relationship between productivity and costs.
• Demonstrate the difference between fixed and variable costs.
• List and graph seven specific cost definitions used by economists.
• Explain increasing productivity and cutting costs.

Explicit and Implicit Costs

• Explicit costs: Actual monetary payments made to non-owners for resources.
• Implicit costs: The opportunity cost of using an owner's resources without paying them out in cash.

Profit

• Accounting profit: Total revenue minus total explicit costs.
• Economic profit: Total revenue minus all costs, including explicit and implicit costs.
• Normal profit: The minimum profit needed to keep an entrepreneur in a business—it's considered an implicit cost.

Theory of Production

• Short run: A period where at least one input in the production process is fixed.
• Total Product: The total output of any production process.
• Marginal Product (MP): The increase in total product resulting from adding one more unit of input (usually labor).
• Average Product (AP): Total product divided by the quantity of inputs used to generate that total product.

Division of Labor

• Division of labor: Breaking the production process into specialized tasks, each performed by a different worker.
• Benefits: Increased worker dexterity, efficient time use, and easier machinery specialization.
• Law of Diminishing Returns: As more of a variable input is added to a fixed input, the resulting increase in output will eventually diminish.

Marginal and Variable Costs

• Total Variable Cost (TVC): The total cost of all inputs that vary with the production level.
• Marginal Cost (MC): The increase in total variable costs when one additional unit of output is produced.
• Average Variable Cost (AVC): Total variable cost divided by total output.

Total and Average Total Costs

• Total Fixed Costs (TFC): Costs that don't change with the level of output.
• Average Fixed Costs (AFC): Total fixed cost divided by output.
• Total Costs (TC): The sum of total fixed and total variable costs.
• Average Total Costs (ATC): Total cost divided by output.

Relationship Between Cost and Product Curves

• Marginal cost (MC) curve: Intersects the AVC and ATC curves at their respective minimum points.
• Average fixed cost (AFC) curve: Always decreasing.
• Q1: Diminishing returns point.
• Q2: Most productive output point.
• Q3: Economic capacity point.

Key Concepts to Remember

• Implicit and explicit costs.
• Normal and economic profit.
• Total, average, and marginal product.
• Law of diminishing returns.
• Cost curves (MC, ATC, AVC, AFC).