Chapter 13: Costs of production Flashcards
(69 cards)
What is the total revenue?
The amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold
What do economists normally assume is the goal of a firm?
to maximize profit
What is the total cost of a firm?
The market value of the inputs a firm uses in production
What is the equation for profit?
total revenue - total cost
What are explicit costs?
Inputs that require an outlay of money by the firm
What are implicit costs?
input costs that do not require an outlay of money by the firm.
What is the implicit cost of starting a business?
The lost wages from another job
What are the explicit costs of a cookie business?
The cost of the flour, chocolate, etc.
How do accountants differ from economists in how they treat costs?
Economists are interested in studying how firms make decisions based on explicit and implicit costs; accountants have a job of keeping track of money going in and out. Accountants do not look at implicit costs.
How do economists and accountants treat capital differently?
An accountant will only view spent capital if it is a loan or with interest gained; Economists will also view the lost potential interest on spent savings as an implicit cost.
What is economic profit?
total revenue - total profit; including both explicit and implicit costs
What is an accounting profit?
total revenue minus total explicit costs
For a business to be profitable from an economists standpoint,
total revenue must cover all the opportunity costs, both -explicit and implicit
When economic profit is negative, a business…
fails to cover all the costs of production. the business will eventually close down.
Economic profit is usually — than accounting profit
lower
Farmer McDonald gives banjo lessons for $20 per hour. One day, he spends 10 hours planting $100 worth of seeds on his farm. What total cost has he incurred?
$300
Xavier opens up a lemonade stand for two hours. He spends $10 on ingredients and sells $60. in the same two hours he could have mowed his neighbour’s lawn for $40. Xavier earns what accounting profit and what economic profit?
Accounting profit: $50
Economic profit: $10
What is the production function?
The relationship between quantity of inputs used to make a good and the quantity of output of that good.
What is diminishing marginal product?
The property whereby the marginal product of an input declines as the quantity of the input increases
What is the marginal product?
The increase in output that arises from an additional unit of input
Assuming no general conditions change, why does factory work express diminishing marginal product?
Each additional worker takes up a smaller share of the space and cannot work effectively.
How does the total cost curve differ from the production function?
It has the inverse shape; it gets steeper with more quantity of output
How do you calculate the slope of a production function?
Change in output / each additional unit of Labour.
The slope of the production function measures the marginal — of a worker
product
