Podcast
Questions and Answers
Which of the following best describes the relationship between a firm's production process and its total costs?
Which of the following best describes the relationship between a firm's production process and its total costs?
- Total costs are independent of the production process.
- Total costs are solely determined by market demand, irrespective of the production process.
- The production process determines the quantity of inputs required, which directly influences total costs. (correct)
- The production process only affects implicit costs, not explicit costs.
What is the primary goal economists assume firms are trying to achieve?
What is the primary goal economists assume firms are trying to achieve?
- Minimizing environmental impact.
- Maximizing market share.
- Maximizing employee satisfaction.
- Maximizing profit. (correct)
John is a skilled painter who could earn $100 per hour. Instead, he spends his time working in his cake factory. How would an economist describe the $100 per hour?
John is a skilled painter who could earn $100 per hour. Instead, he spends his time working in his cake factory. How would an economist describe the $100 per hour?
- An implicit cost. (correct)
- An explicit cost.
- An accounting profit.
- A fixed cost.
John used $300,000 of his savings to buy his cake factory. If he had instead invested this money and earned $15,000 per year in interest, what type of cost describes $15,000?
John used $300,000 of his savings to buy his cake factory. If he had instead invested this money and earned $15,000 per year in interest, what type of cost describes $15,000?
Which of the following statements best describes the difference in how economists and accountants view a firm's costs?
Which of the following statements best describes the difference in how economists and accountants view a firm's costs?
What is the critical distinction between the short run and the long run for a firm?
What is the critical distinction between the short run and the long run for a firm?
What does the marginal product of labor measure?
What does the marginal product of labor measure?
What is the 'diminishing marginal product'?
What is the 'diminishing marginal product'?
How does the total-cost curve change as output increases, and what economic principle explains this change?
How does the total-cost curve change as output increases, and what economic principle explains this change?
Fixed costs are best defined as costs that:
Fixed costs are best defined as costs that:
What distinguishes variable costs from fixed costs?
What distinguishes variable costs from fixed costs?
What is the formula for average total cost (ATC)?
What is the formula for average total cost (ATC)?
What does average fixed cost (AFC) represent?
What does average fixed cost (AFC) represent?
How is average variable cost (AVC) calculated?
How is average variable cost (AVC) calculated?
What information does average total cost give you?
What information does average total cost give you?
What does marginal cost (MC) measure?
What does marginal cost (MC) measure?
If a firm's total costs are $100,000 and it produces 1,000 units, what is its average total cost?
If a firm's total costs are $100,000 and it produces 1,000 units, what is its average total cost?
A firm has fixed costs of $50,000. If it produces 1,000 units, what is its average fixed cost?
A firm has fixed costs of $50,000. If it produces 1,000 units, what is its average fixed cost?
A firm's total variable costs are $20,000, and it produces 500 units. What is the firm's average variable cost?
A firm's total variable costs are $20,000, and it produces 500 units. What is the firm's average variable cost?
Imagine a firm's marginal cost for producing the 100th unit is $15. What does this indicate?
Imagine a firm's marginal cost for producing the 100th unit is $15. What does this indicate?
What happens to average fixed cost (AFC) as output increases?
What happens to average fixed cost (AFC) as output increases?
How is profit calculated?
How is profit calculated?
Which of the following is an example of an explicit cost for a bakery?
Which of the following is an example of an explicit cost for a bakery?
How do firms use the concept of 'thinking at the margin' when making decisions?
How do firms use the concept of 'thinking at the margin' when making decisions?
How might diminishing marginal product affect a firm's decision to hire additional workers?
How might diminishing marginal product affect a firm's decision to hire additional workers?
Flashcards
What is Total Revenue?
What is Total Revenue?
The amount that a firm receives for the sale of its output.
What is Total Cost?
What is Total Cost?
The amount a firm pays to buy inputs for production.
What is Profit?
What is Profit?
Total revenue minus total cost.
Opportunity Cost?
Opportunity Cost?
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Explicit Costs
Explicit Costs
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Implicit Costs?
Implicit Costs?
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What is the short run?
What is the short run?
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What is the long run?
What is the long run?
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Marginal Product?
Marginal Product?
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Diminishing Marginal Product
Diminishing Marginal Product
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What are Fixed Costs?
What are Fixed Costs?
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What are Variable Costs?
What are Variable Costs?
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What is Average Total Cost (ATC)?
What is Average Total Cost (ATC)?
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What is Average Fixed Cost (AFC)?
What is Average Fixed Cost (AFC)?
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What is Average Variable Cost (AVC)?
What is Average Variable Cost (AVC)?
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Marginal Cost (MC)?
Marginal Cost (MC)?
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Study Notes
- Firms incur costs as part of producing goods and services
- Economists assume a firm's goal is to maximise profit
Total Revenue, Total Cost, and Profit
- Profit equals total revenue minus total cost
- Total Revenue is the amount a firm receives from selling output
- Total Cost is the amount a firm pays for inputs
- Profit = Total revenue - Total cost
Opportunity Costs
- Opportunity costs are all the explicit and implicit costs
- Explicit costs are direct payments for inputs, like wages
- Implicit costs are indirect costs, such as the opportunity cost of capital
- The total cost of a business equals the sum of all explicit and implicit costs
Economic vs Accounting View
- Economists consider all opportunity costs, implicit and explicit when analysing a firm
- Accountants track the flow of money, measuring explicit costs but ignoring implicit costs
- Economic profit is smaller than accounting profit, as it includes all costs
- Accounting Profit is revenue less the firm's explicit costs
- Economic Profit is revenue less all opportunity costs (explicit and implicit)
Production and Costs
- Short run is a period where at least one factor of production is fixed
- Long run is the time needed for all factors of production to become variable
- Marginal product is the increase in output from an additional unit of input
- Diminishing marginal product arises when the marginal product of an input declines as the quantity of the input increases
Total-Cost Curve
- A total-cost curve shows the relationship between quantity of output and total production cost
- A total-cost curve gets steeper as the quantity of output increases due to diminishing marginal product
Measures of Costs
- Total cost can be divided into fixed costs and variable costs
- Fixed costs do not vary with the quantity of output produced
- Variable costs change as the firm alters the quantity of output produced
Average and Marginal Cost
- Average total cost (ATC) is total cost divided by the quantity of output
- Average fixed cost (AFC) is fixed cost divided by the quantity of output
- Average variable cost (AVC) is variable cost divided by the quantity of output
- Marginal cost (MC) is the increase in total cost from an extra unit of production
- Average total cost is the cost of the typical unit of output
- Marginal cost is the increase in total cost from producing an additional unit
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