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What is the process of transforming resources into a good or service called?
What is the process of transforming resources into a good or service called?
Production
What are the resources used in production called?
What are the resources used in production called?
Inputs
What is the quantity of goods or services produced called?
What is the quantity of goods or services produced called?
Output
Which of the following is a resource used in production?
Which of the following is a resource used in production?
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A labour-intensive process uses more capital than labor
A labour-intensive process uses more capital than labor
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Capital-intensive processes involve a larger proportion of labor than capital.
Capital-intensive processes involve a larger proportion of labor than capital.
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What is the ability to produce a given quantity of output at the lowest cost called?
What is the ability to produce a given quantity of output at the lowest cost called?
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What is the difference between total revenue and total costs (explicit costs) called?
What is the difference between total revenue and total costs (explicit costs) called?
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What are the payments for resources and supplies called?
What are the payments for resources and supplies called?
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What are the costs that owners give up by being involved in a business called?
What are the costs that owners give up by being involved in a business called?
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What is the difference between total revenue and economic costs called?
What is the difference between total revenue and economic costs called?
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Accounting profits are always greater than economic profits
Accounting profits are always greater than economic profits
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What is the minimum return necessary for owners to keep their money and skills in the business called?
What is the minimum return necessary for owners to keep their money and skills in the business called?
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Normal profit is earned by the business owner when economic profits equals 0
Normal profit is earned by the business owner when economic profits equals 0
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In the short run, firms can adjust the quantity of all inputs.
In the short run, firms can adjust the quantity of all inputs.
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What is the period in which at least one input is fixed called?
What is the period in which at least one input is fixed called?
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What is the period in which all inputs can be varied called?
What is the period in which all inputs can be varied called?
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Producers strive to maximize profits
Producers strive to maximize profits
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Adam Smith's theory of the Invisible Hand argues that producers should decrease costs
Adam Smith's theory of the Invisible Hand argues that producers should decrease costs
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What are inputs whose quantities can be adjusted in the short run called?
What are inputs whose quantities can be adjusted in the short run called?
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The law of diminishing marginal returns applies in both the short run and long run.
The law of diminishing marginal returns applies in both the short run and long run.
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What is the extra output produced by one more unit of input called?
What is the extra output produced by one more unit of input called?
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What is the total quantity produced with a given workforce called?
What is the total quantity produced with a given workforce called?
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What is the quantity of output produced per worker called?
What is the quantity of output produced per worker called?
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The law of diminishing marginal returns states that marginal product will decrease as a variable input is increased.
The law of diminishing marginal returns states that marginal product will decrease as a variable input is increased.
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When marginal product (MP) is decreasing, total product (TP) is always decreasing
When marginal product (MP) is decreasing, total product (TP) is always decreasing
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If marginal product is increasing, total product is increasing at an increasing rate
If marginal product is increasing, total product is increasing at an increasing rate
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Average product peaks when it equals marginal product
Average product peaks when it equals marginal product
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What is the extra cost of producing one more unit of output called?
What is the extra cost of producing one more unit of output called?
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What is the sum of fixed costs and variable costs called?
What is the sum of fixed costs and variable costs called?
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What is fixed cost divided by the quantity of output called?
What is fixed cost divided by the quantity of output called?
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What is variable cost divided by the quantity of output called?
What is variable cost divided by the quantity of output called?
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Marginal cost is the difference between average total cost and average variable cost
Marginal cost is the difference between average total cost and average variable cost
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The marginal cost curve is shaped like a J because of the law of diminishing returns
The marginal cost curve is shaped like a J because of the law of diminishing returns
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Average fixed cost falls as output rises
Average fixed cost falls as output rises
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Average variable cost always falls as output rises
Average variable cost always falls as output rises
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Average total cost falls until it intersects with marginal cost
Average total cost falls until it intersects with marginal cost
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In the long run, fixed inputs become variable inputs
In the long run, fixed inputs become variable inputs
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The law of diminishing marginal returns applies in the long run
The law of diminishing marginal returns applies in the long run
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The law of increasing returns to scale occurs when all inputs are increased simultaneously
The law of increasing returns to scale occurs when all inputs are increased simultaneously
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The law of increasing returns to scale is always true in the long run
The law of increasing returns to scale is always true in the long run
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The law of diminishing returns to scale occurs when a firm's output increases proportionally less than the increase in its inputs
The law of diminishing returns to scale occurs when a firm's output increases proportionally less than the increase in its inputs
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The long-run average cost curve is always a U-shape
The long-run average cost curve is always a U-shape
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The long-run average cost curve is saucer-shaped because of the law of diminishing returns
The long-run average cost curve is saucer-shaped because of the law of diminishing returns
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The long-run average cost curve is determined by finding the minimum short-run average cost at each output level
The long-run average cost curve is determined by finding the minimum short-run average cost at each output level
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The long-run average cost curve is always downward sloping
The long-run average cost curve is always downward sloping
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Manufacturing industries tend to experience increasing returns to scale initially
Manufacturing industries tend to experience increasing returns to scale initially
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Craft industries tend to experience constant returns to scale over a wider range of output levels
Craft industries tend to experience constant returns to scale over a wider range of output levels
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Primary industries tend to experience decreasing returns to scale
Primary industries tend to experience decreasing returns to scale
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Study Notes
Chapter 4: Costs of Production
- This chapter examines the costs associated with production.
- Learning objectives include identifying economic costs (explicit and implicit), understanding short-run and long-run production, deriving short-run costs, and explaining long-run production results (increasing, constant, and decreasing returns to scale).
Chapter 4.1: Production, Costs, and Profit
- Production is transforming resources into goods or services.
- Inputs are resources like land, labor, and capital used in production.
- Output is the quantity of goods or services resulting from production.
- Productive efficiency involves making a given amount of output at the lowest cost.
- Labour-intensive processes rely more on labor, less on capital.
- Capital-intensive processes utilize more capital, less labor.
- Labour-intensive processes rely more on labor, less on capital.
Accounting Profits vs. Economic Profits
- Accounting Profit = Total Revenue - Total Costs (explicit costs)
- Economic costs include explicit costs (payments for resources) and implicit costs (opportunity costs, what owners give up).
- Economic Profit = Total Revenue - Economic Costs
- Accounting profits are usually higher than economic profits because accounting profits only consider explicit costs.
- Normal Profit is the minimum return owners need to keep their money and skills in the business (Economic Profits=0). If only a normal profit is generated, the owner is earning the same whether running the business or pursuing a different opportunity.
Chapter 4.2: Production in the Short Run
-
Theory of the Firm: Producers aim to maximize profit.
- Producers respond to self-interest by increasing revenue and decreasing costs, leading to increased profits.
- Fixed inputs cannot be adjusted in the short run (e.g., land, capital).
- Variable inputs can be adjusted in the short run (e.g., labor, materials).
- The short run is defined by at least one fixed input.
- In the Short Run the maximum capacity is fixed due to shortage if at least one resource. (e.g. land).
Chapter 4.2: Production in the Short Run - cont'd
- Law of Diminishing Marginal Returns: Marginal product increases with additional variable inputs, but only to a point. Beyond that point, increases in the variable input have a less noticeable positive effect on output because of decreasing efficiency in using fixed inputs.
Chapter 4.2: Production in the Short Run - cont'd
- Total Product (TP): Total quantity produced with a specific workforce.
- Average Product (AP): Quantity of output produced per worker (TP / L).
- Marginal Product (MP): The extra output produced by one more unit of an input (ΔQ / ΔL).
Chapter 4.2: Production in the Short Run - cont'd
-
The Three Stages of Production:
- Stage 1: MP is increasing, TP is increasing rapidly (steep slope).
- Stage 2: MP is decreasing, TP is still increasing but slowly (flattening slope).
- Stage 3: MP is negative, TP starts decreasing; AP peaks when it equals to MP.
Chapter 4.3: Costs in the Short Run
- Total Costs (TC): Sum of fixed costs (FC) and variable costs (VC).
- Fixed Costs (FC): Costs that remain constant regardless of output level (e.g., rent, property taxes).
- Variable Costs (VC): Costs that vary with the level of output (e.g., labor, materials, fuel).
-
Average Costs:
- Average Fixed Cost (AFC): FC / Q
- Average Variable Cost (AVC): VC / Q
- Average Cost (AC): TC / Q (or AFC + AVC).
- Marginal Cost (MC): Extra cost of producing one additional unit of output (ΔTC / ΔQ).
Chapter 4.4: Production in the Long Run
- In the long run, all inputs can be varied.
- The law of diminishing marginal returns doesn't apply for all inputs.
- Instead long run has different stages that may arise.
Chapter 4.4: Production in the Long Run - cont'd
-
Returns to Scale:
- Increasing Returns to Scale: Output increases proportionally more than inputs. (e.g.: more output by expanding production with the same resources)
- Constant Returns to Scale: Output increases proportionally to inputs.
- Decreasing Returns to Scale: Output increases proportionally less than inputs. (e.g. greater output by increasing resources would not continue past a point).
Chapter 4.4: Production in the Long Run - Costs
-
Long-run average cost (LRAC) curve: the lowest possible average cost for any level of output.
- Shape of the LRAC curve: U-shaped, reflecting different returns to scale at different output quantities.
- Relationship between short-run and long-run average costs: the LRAC curve is the envelope of all short-run average cost curves.
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Description
This chapter delves into the costs associated with production, including both economic costs and production techniques. Learn to differentiate between accounting and economic profits, and grasp the concepts of productive efficiency and returns to scale in both short-run and long-run production. Enhance your understanding of how resources transform into goods or services.
