chp 7 Production &Costs

Question 1

Profit

Answer 1

Goal of firms is to max profits
profit=Total revenue-total costs
Max profit=min cost of producing

Question 2

3 Categories of economic profit

Answer 2

Positive, losses, normal

Question 3

Positive Econ Profits

Answer 3

super high, unexpected profits for firms in that industry, attract entrepreneurs and induce new firms to market

Question 4

Econ. Losses Profits

Answer 4

negative profits, firms will consistently earn losses and leave market or industry

Question 5

Normal Econ Profits

Answer 5

zero profit, no new firms will enter but old firms won’t be motivated to leave they make an accounting profit

Question 6

Production Function

Answer 6

every firm has this, relationship between quantity of input used and q of output produced (efficient technology produces most output)

Question 7

Two types of input

Answer 7

Fixed, variable

Question 8

Fixed Inputs

Answer 8

inputs that can’t vary in quantity for a period of time ex physical capital (a classroom can eventually put in new seats but for NOW they are fixed with a certain # of seats)
period of time all inputs can vary =longrun
period of time at least 1 input is fixed=shortrun

Question 9

Variable inputs

Answer 9

inputs that can vary in quantity ex. Labour (you can add shifts and employees to increase or decrease production)
Long run

Question 10

Marginal Product MP

Answer 10

Change in total output as we change the number of variable inputs ex. if i hire another worker how much will my total output incr. or decr.
MP= change in Q / change in # of inputs

Question 11

In Marginal Product if input is fixed…

Answer 11

variable inputs will have diminishing marginal product

Question 12

Average Product AP

Answer 12

amount of output per input

AP= Q / # of input

Question 13

AP MP relationship

Answer 13

MP>AP=INCRS AP

MP

Question 14

Total Fixed Costs TFC

Answer 14

costs that do not vary with quantity of output produced ex loans, rent

Question 15

Total variable costs TVC

Answer 15

Costs that do vary with quantity of output produced ex labour costs, raw materials
INPUT X OUTPUT

Question 16

Total costs TC

Answer 16

TFC+TVC

Question 17

Average Total Cost AVC

Answer 17

TC/Q

Question 18

Average Fixed Costs AFC

Answer 18

TFC/Q

Question 19

Average Variable Costs AVC

Answer 19

TVC/Q

Question 20

Marginal Costs

Answer 20

Increase in total cost that arises from an extra unit of production
MC= Change in TC / Change in Q
Mc is slope of TC

Question 21

MC AND ATC Relation

Answer 21

MCATC= INCR ATC

MIN ATC IS POINT OF EFFICIENT SCALE

Question 22

LRAC

Answer 22

Long run average cost curve

efficient when Q is between Q1 & Q2 where firm is producing min LRAC (Q1)

Question 23

Scale economics in the LR

Answer 23

different levels of output place firms on different points on their LRAC curve

Question 24

Increasing Returns To Scale IRS

Answer 24

LR average total cost FALLS AS Q INCREASES
Firms can lower AC by increasing output
Left side of decreasing LRAC

Question 25

Decreasing Returns To Scale DRS

Answer 25

LR average total costs RISES AS Q INCRS.
Firms can lower Ac by decreasing output
Right side of increasing LRAC

Question 26

Constant Returns to Scale CRS

Answer 26

LR average total costs STAYS the same as Q INCRS.

middle of LRAC