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 (C)</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 (C)</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 (A)</p> Signup and view all the answers

What is an example of an explicit cost?

<p>The cost of labour hired by the firm (B)</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 (D)</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 (A)</p> Signup and view all the answers

What are the different types of firms?

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

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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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