Short Run Costs in Production
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Questions and Answers

What is the difference between explicit and implicit costs?

  • Explicit costs are monetary payments and implicit costs are opportunity costs (correct)
  • Explicit costs are opportunity costs and implicit costs are monetary payments
  • Explicit costs are long-run costs and implicit costs are short-run costs
  • Explicit costs are variable costs and implicit costs are fixed costs

    • What is the formula for accounting profit?

  • Total Revenue + Total Explicit Cost
  • Total Revenue - Total Explicit Cost (correct)
  • Total Revenue / Total Explicit Cost
  • Total Explicit Cost - Total Revenue

    • What is normal profit?

  • The total return required by the owners of the firm
  • The maximum return required by the owners of the firm
  • The average return required by the owners of the firm
  • The minimum return required by the owners of the firm (correct)

    • What is economic profit?

    <p>The additional return to the owners of the firm over and above the opportunity cost of their own inputs</p> Signup and view all the answers

    What is the difference between short-run and long-run cost curves?

    <p>Short-run cost curves show the cost of production in the short period, while long-run cost curves show the cost of production in the long period</p> Signup and view all the answers

    What is an example of an implicit cost?

    <p>The opportunity cost of using land already owned by the firm</p> Signup and view all the answers

    What is an example of an explicit cost?

    <p>The cost of labour hired by the firm</p> Signup and view all the answers

    What is the principal-agent problem?

    <p>A problem that arises when the owners of a firm have different goals from the managers of the firm</p> Signup and view all the answers

    What is the difference between total revenue and marginal revenue?

    <p>Total revenue is the total amount of money earned by the firm, while marginal revenue is the additional revenue earned by the firm</p> Signup and view all the answers

    What are the different types of firms?

    <p>Individual trader, partnership, companies, close corporations, and cooperatives</p> Signup and view all the answers

    Study Notes

    Types of Costs

    • There are three main types of costs: Total Costs (TFC/TVC/TC), Average Costs (AFC/AVC/ATC), and Marginal Cost (MC)

    Total Costs

    • Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)

    Average Costs

    • Average Total Costs (ATC) = Total Costs (TC) / Quantity Produced
    • Average Variable Costs (AVC) = Total Variable Costs (TVC) / Quantity Produced
    • Average Fixed Costs (AFC) = Total Fixed Costs (TFC) / Quantity Produced

    Marginal Cost

    • Marginal Cost (MC) = Change in Total Cost / Change in Output
    • MC is the increase in total cost associated with a one-unit increase in production

    Long-Run Average Total Cost (LRATC)

    • In the long run, all inputs are variable, and there are no fixed inputs
    • Law of diminishing returns does not apply in the long run
    • Economies of scale occur when more units of a good or service can be produced on a larger scale with fewer input costs
    • Constant returns to scale occur when increasing the number of inputs leads to an equivalent increase in output
    • Diseconomies of scale occur when long-run average costs start to rise with increased output

    Short-Run Production

    • Short run: period in which at least one of the inputs is fixed
    • Assumptions: the firm produces only one product, homogeneous, infinitely divisible amounts, production function, prices given, fixed inputs, and one variable input

    Short-Run Costs

    • Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
    • Average Total Costs (ATC) = Total Costs (TC) / Quantity Produced
    • Average Variable Costs (AVC) = Total Variable Costs (TVC) / Quantity Produced
    • Average Fixed Costs (AFC) = Total Fixed Costs (TFC) / Quantity Produced
    • Marginal Cost (MC) = Change in Total Cost / Change in Output

    Profit, Revenue, and Cost

    • Profit = Total Revenue - (Total Explicit Cost + Total Implicit Cost)
    • Normal Profit: the minimum return required by the owners of the firm to engage in a particular operation
    • Accounting Profit (Total Profit) = Total Revenue - Total Explicit Cost
    • Economic Profit = Accounting Profit - Normal Profit

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    Description

    Understanding fixed and variable costs in production, including marginal costs and how they change with output.

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