Ch. 14 Flashcards
(19 cards)
What is total revenue?
the amount a firm receives for the sale of its output
What is total cost
the market value of the inputs a firm uses in production
What is profit?
Profit = Total revenue - Total cost
What are explicit costs?
input costs that require an outlay of money by the firm
EX: When Amy owns a cookie factory and hires workers to make the cookies, their wages are part of the firm’s costs. Because these opportunity costs require the firm to pay out some money, they’re explicit costs.
What are implicit costs?
input costs that do not require an outlay of money by the firm
EX: When Amy is good with computers and could earn $100 per hour working as a programmer, but for every hour that she works at her cookie factory, she gives up $100 in programming income, and this forgone income is also a part of her costs
What is economic profit?
Total revenue - Total Cost
(total cost including both implicit and explicit costs)
What’s the difference in how an economist views a firm and how an accountant views a firm?
An economist measures a firm’s economic profit as its total revenue minus all its opportunity costs (explicit and implicit) of producing the goods and services sold.
An accountant measures the firm’s accounting profit as its total revenue minus only its explicit costs
What is accounting profit?
Total revenue - Total explicit costs
What is production function?
The relationship between the quantity of inputs used to make a good and the quantity of output of that good
EX: The relationship between the quantity of inputs (workers) and quantity of output (cookies)
What is marginal product?
The increase in output that arises from an additional unit of input
EX: When the number of workers goes from 1 to 2, cookie production increases from 50 to 90, so the marginal product of the second worker is 40 cookies.
What is the diminishing marginal product?
The property whereby the marginal product of an input declines as the quantity of the input increases.
EX: Notice that as the number of workers increases, the marginal product declines. The second worker has a marginal product of 40 cookies, the third has a marginal product of 30 cookies, and the fourth has a marginal product of 20 cookies. At first, when there are only a few workers in the factory they have easy access to kitchen equipment, but as hiring increases the workers must share equipment and deal with more crowded conditions. Hence, as more workers are hired, each extra worker contributes fewer additional cookies to total production.
What are fixed costs?
Costs that do not vary with the quantity of output produced.
What are variable costs?
Costs that vary with the quantity of output produced.
What is the average total cost?
total cost divided by the quantity of output
Tells us the cost of a typical unit of output if total cost is divided evenly over all the units produced.
What is the average fixed cost?
fixed cost divided by the quantity of output
What is the average variable cost?
variable cost divided by the quantity of output
What is the marginal cost?
the increase in total cost that arises from an extra unit of production
Tells us the increase in total cost that arises from producing an additional unit if output.
What is the efficient scale?
The quantity of output that minimizes average total cost.
EX: For Caleb, the efficient scale is 5 or 6 cups of coffee per hour. If he produces more or less than this amount, average total cost rises above the minimum of $1.30.
What’s the relationship between marginal cost and average total cost?
Whenever marginal cost is less than average total cost, average total cost is falling. Whenever marginal cost is greater than average total cost, average total cost is rising.
