Microeconomics Chapter 7 Flashcards

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.