Microeconomics Chapter 7 Flashcards

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Questions and Answers

What is the definition of economic cost?

The sum of explicit and implicit costs (correct)

A cost that varies with output

The total revenue of a firm

The payment required to purchase a resource

What are explicit costs?

Monetary payments made for resources not owned by the firm.

What are implicit costs?

Opportunity costs of using owned resources instead of selling them.

Define accounting profit.

Revenue less explicit costs. Signup and view all the answers

What is normal profit?

The expected amount of accounting profit from an alternative venture. Signup and view all the answers

Define economic profit.

Revenue less explicit costs and implicit costs. Signup and view all the answers

What does the short run refer to in economics?

A period too brief for altering plant capacity but long enough to adjust usage. Signup and view all the answers

What does the long run refer to?

A period long enough to adjust all resource quantities, including plant capacity. Signup and view all the answers

Define total product (TP).

The total quantity of a particular good or service produced. Signup and view all the answers

What is the Total Product Curve?

It illustrates the relationship between total product and variable input. Signup and view all the answers

Define marginal product (MP).

The extra output from adding one unit of a variable input. Signup and view all the answers

What does the Marginal Product Curve reflect?

The relationship between marginal product and variable input. Signup and view all the answers

Define average product (AP).

Output per unit of labor input. Signup and view all the answers

What does the Average Product Curve illustrate?

Average product’s relationship with variable input. Signup and view all the answers

What is the law of diminishing returns?

Marginal product declines as more of a variable resource is added to fixed resources. Signup and view all the answers

Define fixed costs.

Costs that do not change with output level. Signup and view all the answers

What are variable costs?

Costs that change with the level of output. Signup and view all the answers

Total cost is equal to _ + __.

Total fixed cost + Total variable cost Signup and view all the answers

Average fixed cost (AFC) is defined as ________ = TFC / Qty.

AFC Signup and view all the answers

Average variable cost (AVC) is defined as ________ = TVC / Qty.

AVC Signup and view all the answers

Average total cost (ATC) is defined as ________ = TC / Qty.

ATC Signup and view all the answers

Marginal cost is defined as _______ = change in TC / change in Q.

MC Signup and view all the answers

What are economies of scale?

Lower average costs as plant size increases. Signup and view all the answers

Define diseconomies of scale.

Increases in average total cost as a firm enlarges output. Signup and view all the answers

What are constant returns to scale?

Unchanging average total cost as output changes. Signup and view all the answers

Define minimum efficient scale.

The lowest output level at which long-run average costs are minimized. Signup and view all the answers

What is a natural monopoly?

A market where average total cost is minimized with only one producer. Signup and view all the answers

Study Notes

Economic Costs

Economic cost encompasses both explicit and implicit costs necessary to secure and maintain resource usage.
Explicit costs represent direct monetary payments for resources not owned, highlighting opportunity costs involved in those transactions.
Implicit costs are non-obvious, opportunity-based costs associated with utilizing owned resources in production instead of selling them.

Profit Types

Accounting profit is calculated as total revenue minus explicit costs.
Normal profit is the expected accounting profit from alternative business ventures.
Economic profit is derived from total revenue minus both explicit and implicit costs, indicating resource allocation efficiency in relation to consumer demand.

Time Periods in Production

The short run allows firms to adjust their operational intensity without changing plant capacity, utilizing fixed resources creatively.
The long run enables adjustments in the quantity of all resources, including plant size, with potential for industry entry or exit by firms.

Production Metrics

Total product (TP) signifies the overall quantity of goods or services produced.
The Total Product Curve displays the relationship between TP and a variable input and showcases an initial steep increase followed by a flattening and decline.
Marginal product (MP) measures the additional output from an extra unit of a variable resource, demonstrating diminishing returns as more variable resources are applied to a fixed resource.

Cost Concepts

Fixed costs remain unchanged regardless of output levels and incur financial obligation even at zero output.
Variable costs fluctuate with output levels, adjustable in the short run through production changes.
Total cost (TC) is the summation of fixed and variable costs at different output levels.
Average fixed cost (AFC) declines with increased output as fixed costs are distributed over greater production.

Production Cost Curves

Average variable cost (AVC) represents variable cost per unit, while average total cost (ATC) encompasses all costs per unit.
Marginal cost (MC) accounts for the additional cost incurred from producing one more output unit, directly influenced by production decisions.
Economies of scale result in decreasing ATC as production scales up, whereas diseconomies of scale indicate rising ATC with larger production volumes.

Long-Run Cost Considerations

The long-run ATC curve combines segments of short-run ATC curves, representing the most efficient production methods over time.
Minimum efficient scale denotes the output level at which a firm achieves the lowest long-run average costs possible.
Natural monopolies occur when a single firm's production minimizes average total cost within a specific market.

Efficiency and Returns

The law of diminishing returns states that adding variable resources to fixed resources will eventually yield smaller increases in output.
Constant returns to scale indicate a direct proportional relationship between input increases and output levels, resulting in unchanged average costs.

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Test your knowledge on key terms from Chapter 7 of Microeconomics with these flashcards. Understand essential concepts like economic costs and explicit costs while reinforcing your learning. Perfect for students preparing for exams.