Questions and Answers
What is the definition of economic cost?
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.
Signup and view all the answers
What is normal profit?
Signup and view all the answers
Define economic profit.
Signup and view all the answers
What does the short run refer to in economics?
Signup and view all the answers
What does the long run refer to?
Signup and view all the answers
Define total product (TP).
Signup and view all the answers
What is the Total Product Curve?
Signup and view all the answers
Define marginal product (MP).
Signup and view all the answers
What does the Marginal Product Curve reflect?
Signup and view all the answers
Define average product (AP).
Signup and view all the answers
What does the Average Product Curve illustrate?
Signup and view all the answers
What is the law of diminishing returns?
Signup and view all the answers
Define fixed costs.
Signup and view all the answers
What are variable costs?
Signup and view all the answers
Total cost is equal to _________ + __________.
Signup and view all the answers
Average fixed cost (AFC) is defined as ________ = TFC / Qty.
Signup and view all the answers
Average variable cost (AVC) is defined as ________ = TVC / Qty.
Signup and view all the answers
Average total cost (ATC) is defined as ________ = TC / Qty.
Signup and view all the answers
Marginal cost is defined as _______ = change in TC / change in Q.
Signup and view all the answers
What are economies of scale?
Signup and view all the answers
Define diseconomies of scale.
Signup and view all the answers
What are constant returns to scale?
Signup and view all the answers
Define minimum efficient scale.
Signup and view all the answers
What is a natural monopoly?
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
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.