Questions and Answers
What are opportunity costs of resources?
What is an explicit cost?
Costs arising from transactions where the firm purchases inputs.
What are implicit costs?
Costs associated with the use of the firm's own resources.
What is the definition of the short run in economics?
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What is the total fixed cost formula?
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What do total variable costs depend on?
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What is the total cost formula?
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How is marginal cost (MC) defined?
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What is average fixed cost (AFC)?
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What is average variable cost (AVC)?
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What is average total cost (ATC)?
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What does the production function identify?
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What does the law of diminishing marginal returns state?
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What defines the total product curve?
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What does the marginal cost curve shape indicate?
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What signifies increasing returns to scale?
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What are economies of scale?
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What is diseconomies of scale?
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What defines the minimum efficient scale?
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What is the learning by doing concept?
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Study Notes
Opportunity Costs and Costs
- Opportunity costs represent the value of resources in their best alternative use, including both explicit and implicit costs.
- Explicit costs are recorded transactional costs for purchasing inputs or services, measurable in conventional accounting.
- Implicit costs arise from using the firm's own resources, reflecting potential earnings from alternative uses, making them harder to quantify.
Short Run versus Long Run
- The short run restricts firms from varying all inputs; certain inputs remain fixed.
- Total Fixed Cost (TFC) remains constant regardless of output levels, calculated as a combination of rental rates and entrepreneurial talent costs.
- Total Variable Cost (TVC) depends on output quantities, correlating with variable inputs, particularly labor costs.
Cost Relationships
- Total Cost (TC) is the sum of Total Fixed Cost and Total Variable Costs: TC = TFC + TVC.
- Marginal Cost (MC) indicates the cost of producing one additional unit, derived from changes in TC or TVC as output increases.
Average Costs
- Average Fixed Cost (AFC) is calculated by dividing TFC by output (Q).
- Average Variable Cost (AVC) is calculated by dividing TVC by output (Q).
- Average Total Cost (ATC) is found by dividing TC by output (Q).
Production Functions and Returns
- Production functions identify input combinations needed for specified outputs, with the short-run function focusing on variable inputs.
- The law of diminishing marginal returns indicates that adding more variable inputs results in smaller increases in total output after a certain point.
- Total Product Curve illustrates labor input against output levels, while diminishing returns affect marginal cost and average variable costs.
Cost Curves and Their Behaviors
- The short-run marginal cost curve typically exhibits a U-shape, first falling and then rising due to initial efficiency gains giving way to overutilization.
- MC influences average costs; when MC is below average costs, average costs decline, and when MC exceeds it, average costs increase.
Isoquants and Isocosts
- Isocost lines represent combinations of labor and capital that can be purchased for a given cost.
- The intersection of isocost lines and isoquants identifies cost-efficient input combinations for desired output levels.
- To minimize production costs, a firm should adjust inputs so that the marginal rate of technical substitution equals the rate of input substitution in markets.
Profit Maximization and Cost Minimization
- Firms aim to minimize costs to maximize profits, often operating on the expansion path where input combinations yield the greatest output for the least cost.
- The golden rule of cost minimization guides firms to allocate inputs so that marginal return per dollar spent is equal across all inputs.
Returns to Scale
- Increasing returns to scale occur when output grows disproportionately to input costs, often at lower output levels.
- Decreasing returns to scale are common at high output levels, indicating increased average costs as input requirements rise.
- The long-run average cost (LRAC) curve exhibits a U-shape as initially, increasing returns to scale shift to decreasing returns.
Economies and Diseconomies of Scale
- Economies of scale reflect cost savings when a firm expands output, while diseconomies imply reduced efficiency at larger sizes.
- Minimum efficient scale is defined as the output level where average costs are minimized.
Cost Measurement Techniques
- Surveys help determine the minimum efficient scale in industries by evaluating production sizes.
- The new entrant or survivor technique assesses operational scale through existing firm sizes to inform production scale evaluations.
Cost Function Formulation
- The cubic total cost function is expressed as TC = a + bq + cq^2 + dq^3, where 'q' denotes output, and coefficients (a, b, c, d) require estimation.
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Description
Explore key concepts from Economics Chapter 8 with these flashcards. They cover opportunity costs, explicit costs, and implicit costs to enhance your understanding of resource allocation. Test your knowledge with definitions and examples for each term.
