Podcast
Questions and Answers
What is the primary goal of a firm?
What is the primary goal of a firm?
- Increase market share
- Enhance customer satisfaction
- Maximize profit (correct)
- Minimize costs
How do accountants determine profit for a firm?
How do accountants determine profit for a firm?
- Total revenue divided by total costs
- Total revenue minus explicit costs only
- Total revenue plus total costs
- Total revenue minus total costs (correct)
What type of costs are considered implicit costs?
What type of costs are considered implicit costs?
- Utilities paid for production
- Opportunity costs of owned resources (correct)
- Salaries paid to employees
- Money spent on purchasing equipment
Which of the following describes an explicit cost?
Which of the following describes an explicit cost?
What is the formula for calculating economic profit?
What is the formula for calculating economic profit?
Which costs are included in the opportunity cost of production?
Which costs are included in the opportunity cost of production?
What distinguishes economic profit from accounting profit?
What distinguishes economic profit from accounting profit?
What happens to a firm that fails to maximize profit?
What happens to a firm that fails to maximize profit?
What distinguishes the short run from the long run in terms of resource flexibility?
What distinguishes the short run from the long run in terms of resource flexibility?
Which type of cost is considered irrelevant in a firm's current decision-making?
Which type of cost is considered irrelevant in a firm's current decision-making?
What happens to the marginal product of labor as more labor is employed in the short run?
What happens to the marginal product of labor as more labor is employed in the short run?
What is the definition of total product?
What is the definition of total product?
During the long run, which of the following can a firm change?
During the long run, which of the following can a firm change?
Why are short-run decisions typically considered reversible?
Why are short-run decisions typically considered reversible?
Which of the following statements about average product is true?
Which of the following statements about average product is true?
What describes a sunk cost?
What describes a sunk cost?
What does the implicit rental rate of capital consist of?
What does the implicit rental rate of capital consist of?
Which of the following best describes normal profit?
Which of the following best describes normal profit?
What is an example of an implicit cost for a firm?
What is an example of an implicit cost for a firm?
If the owner of a firm doesn't take a wage, what is the opportunity cost of their labor?
If the owner of a firm doesn't take a wage, what is the opportunity cost of their labor?
What is economic profit calculated as?
What is economic profit calculated as?
What is the difference between explicit and implicit costs?
What is the difference between explicit and implicit costs?
If Irene's $300,000 could have earned her $15,000 per year in a savings account, what does this amount represent?
If Irene's $300,000 could have earned her $15,000 per year in a savings account, what does this amount represent?
What component of implicit costs deals with the change in the market value of capital?
What component of implicit costs deals with the change in the market value of capital?
What does the total product curve illustrate about production levels?
What does the total product curve illustrate about production levels?
What occurs when the marginal product of a worker is lower than that of the previous worker?
What occurs when the marginal product of a worker is lower than that of the previous worker?
What is a primary cause of increasing marginal returns in production?
What is a primary cause of increasing marginal returns in production?
When plotting a marginal product of labour curve, how is it constructed?
When plotting a marginal product of labour curve, how is it constructed?
What is a typical characteristic of production processes as illustrated in the provided information?
What is a typical characteristic of production processes as illustrated in the provided information?
What happens to the total product when the second worker is hired according to the marginal product data?
What happens to the total product when the second worker is hired according to the marginal product data?
What does the height of the bars in the marginal product curve represent?
What does the height of the bars in the marginal product curve represent?
What primarily limits the productivity of additional workers after a certain point?
What primarily limits the productivity of additional workers after a certain point?
How does an increase in productivity affect the position of cost curves?
How does an increase in productivity affect the position of cost curves?
What is the effect of an increase in fixed costs on the cost curves?
What is the effect of an increase in fixed costs on the cost curves?
If a technological advance leads to a firm using more capital and less labor, what happens to the costs?
If a technological advance leads to a firm using more capital and less labor, what happens to the costs?
What is the outcome of an increase in the price of a variable factor of production?
What is the outcome of an increase in the price of a variable factor of production?
Which factor does NOT affect the position of a firm's cost curves?
Which factor does NOT affect the position of a firm's cost curves?
What does the ATC curve represent in relation to the AVC and AFC curves?
What does the ATC curve represent in relation to the AVC and AFC curves?
What characterizes the AVC curve as output increases?
What characterizes the AVC curve as output increases?
At what output level does the MC equal the AVC?
At what output level does the MC equal the AVC?
What happens to the ATC curve when fixed costs are spread over larger output?
What happens to the ATC curve when fixed costs are spread over larger output?
What is indicated when the MC curve is below the AVC curve?
What is indicated when the MC curve is below the AVC curve?
Which of the following describes the relationship between MP and MC?
Which of the following describes the relationship between MP and MC?
What does a U-shaped ATC curve indicate?
What does a U-shaped ATC curve indicate?
When MC is above ATC, what can be inferred about the ATC curve?
When MC is above ATC, what can be inferred about the ATC curve?
Flashcards
Opportunity Cost of Production
Opportunity Cost of Production
The value of the best alternative use of a firm's resources, including costs of resources bought in the market, owned by the firm, and supplied by the owner.
Explicit Costs
Explicit Costs
The costs like wages, rent, or materials that the firm directly pays for.
Implicit Costs
Implicit Costs
Costs that don't involve a direct cash outlay, but represent the value of resources the firm uses from its owners.
Economic Profit
Economic Profit
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Accounting Profit
Accounting Profit
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Firm
Firm
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Maximize Profit
Maximize Profit
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Profit
Profit
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Implicit Rental Rate of Capital
Implicit Rental Rate of Capital
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Economic Depreciation
Economic Depreciation
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Interest Forgone
Interest Forgone
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Opportunity Cost of Financial Capital
Opportunity Cost of Financial Capital
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Normal Profit
Normal Profit
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Opportunity Cost of Owner's Labor
Opportunity Cost of Owner's Labor
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Total Product Curve
Total Product Curve
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Marginal Product of Labor
Marginal Product of Labor
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Diminishing Marginal Returns
Diminishing Marginal Returns
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Increasing Marginal Returns
Increasing Marginal Returns
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Short-Run Technology Constraint
Short-Run Technology Constraint
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Product Curves
Product Curves
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Attainable Output Levels
Attainable Output Levels
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Unattainable Output Levels
Unattainable Output Levels
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Technology
Technology
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Technological Change
Technological Change
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Production Costs
Production Costs
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Total Cost (TC)
Total Cost (TC)
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Average Fixed Cost (AFC)
Average Fixed Cost (AFC)
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Average Variable Cost (AVC)
Average Variable Cost (AVC)
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Average Total Cost (ATC)
Average Total Cost (ATC)
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Marginal Cost (MC)
Marginal Cost (MC)
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MC and AVC Relationship
MC and AVC Relationship
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MC and ATC Relationship
MC and ATC Relationship
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Cost Curves and Technology
Cost Curves and Technology
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Short Run
Short Run
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Long Run
Long Run
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Sunk Cost
Sunk Cost
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Total Product
Total Product
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Average Product of Labor
Average Product of Labor
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Diminishing Marginal Product of Labor
Diminishing Marginal Product of Labor
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Decreasing Average Product of Labor
Decreasing Average Product of Labor
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Study Notes
Output & Costs
- The course is ECON 1000: Microeconomics for Managers, Week 7, taught by Professor Irene Henriques.
- Learning outcomes include explaining and differentiating between economic and accounting measures of production cost and profit, illustrating and explaining a firm's short-run product curves, and deriving and explaining a firm's short-run cost curves.
Economic Cost and Profit
- A firm is an institution that hires factors of production and organizes them to produce and sell goods and services, aiming to maximize profit. Firms that fail to do so are either eliminated or acquired by profit-maximizing competitors.
- Accounting profit is used by accountants to ensure correct tax payments and to demonstrate fund usage to investors. It calculates the difference between total revenue and total cost, following Revenue Canada guidelines and accounting standards.
- Economic accounting, used by economists, focuses on predicting firm decisions that aim to maximize profit. It determines economic profit by subtracting total cost, measured as the opportunity cost of production, from total revenue.
A Firm's Opportunity Cost of Production
- A firm's opportunity cost of production is the value of the best alternative use of the resources it employs in production.
- This cost comprises the cost of resources acquired in the market, resources owned by the firm, and resources supplied by the firm's owner.
Explicit and Implicit Costs
- Explicit costs are input costs that necessitate a money outlay by the firm.
- Implicit costs are input costs that do not require a monetary payment by the firm.
- Resources bought in the market are explicit costs, representing the opportunity cost of production because the firm could have used those resources to produce something else.
- Resources owned by the firm, such as capital, incur an implicit cost, representing the opportunity cost of not using that capital for a different purpose (e.g., renting it out). This implicit cost is the implicit rental rate of capital.
Economic Depreciation and Interest Forgone
- The implicit rental rate of capital comprises economic depreciation (changes in the capital's market value over time) and interest forgone (returns foregone on capital funds that could have been invested elsewhere).
Cost of Capital as an Opportunity Cost
- A significant implicit cost for businesses is the opportunity cost of capital invested.
- This is exemplified by a scenario where a business owner (Irene) used $300,000 of savings to start a factory. If this money had instead been placed in a savings account with a 5 percent interest rate, it would have generated $15,000 per year in interest. This foregone interest is an implicit opportunity cost.
Resources Supplied by the Firm's Owner
- Firm owners may supply entrepreneurship and labor without receiving wages.
- Normal profit, the expected return on entrepreneurship, is viewed as an opportunity cost of production.
Economic Accounting: A Summary
- Economic profit is the total revenue minus the total opportunity cost of production.
Shifts in the Cost Curves
- Two key factors influencing a firm's cost curves are technology and production factor prices.
- Technological increases shift product curves upward and cost curves downward. Changes in factor prices have similar effects, although fixed costs shift only the total and average cost curves.
Short-Run Versus Long-Run Decisions
- Some business decisions are crucial for survival, although some may be irreversible. Others are easily reversed, influencing profitability but not necessarily long-term survival.
- Decisions are frequently categorized as short-run or long-run, where the short run is a timeframe where outputs of some input are fixed, contrasted with the long run, where quantities of all resources, including plant size, can change.
Short-Run Technology Constraints
- To increase output in the short run, firms must increase labor.
- Total product, marginal product, and average product describe the relationship between output and labor amount. Total product measures total output given labor amount; marginal product measures the change in total product given a change in labor; and average product is total product divided by employed labor.
Short-Run Cost Measures
- To produce more output in the short run, firms must increase their costs. Total cost encompasses fixed costs (don't change with output) and variable costs (change with output), while total cost is the sum of both.
- Marginal cost (MC) measures the cost increase from a one-unit production increase; MC declines when marginal returns increase and rises when marginal returns decline.
- Average cost measures per-unit costs (average total cost, average variable cost, average fixed cost).
Relationships Between Product and Cost Curves
- The shapes of a firm's cost curves are determined by technology.
- There are relationships between product and cost curves (particularly the average and marginal product and cost curves), so minimum average variable costs occur at maximum average products and vice-versa.
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Description
Test your understanding of key concepts in economics, particularly focusing on firm behavior, profit calculations, and cost distinctions. This quiz covers topics such as economic versus accounting profit and the implications of profit maximization. Dive into the details of short-run and long-run decision-making in firms.
