Chapter 13 - The Costs of Production Flashcards
Define Total Revenue (for a firm).
The amount a firm receives for the sale of its output.
Define Total Cost.
The amount a firm pays to buy the inputs into production.
Define Profit.
Total Revenue - Total Cost
Define Firms
Economic units formed by profit-seeking people. They employ resources to produce goods and services for sale. Firms help reduce transaction costs (cost involved in negotiating).
Important note about costs.
All resources have an opportunity cost.
What are the two types of opportunity cost?
- Explicit Cost - opportunity cost of resources that take the form of a cash payment. (eg. computers, equipment, etc)
- Implicit Cost - the opportunity cost of a firm using its own resources (or those provided by its owners) without corresponding cash payment. (eg. opportunity cost of owner’s time (i.e. could be working for another firm earning a wage.)
Explain how an accountant and economist view the cost of capital?
For example, if a business borrows money from the bank which comes with a 10% interest, this 10% interest will be considered as an implicit cost as it could have been spent elsewhere. However, an accountant does not count this as a cost at all as no money is flowing out of the business.
What is the difference between accounting and economic profit?
Accounting profit = total revenue - explicit costs only.
Economic profit = total revenue - explicit & implicit costs.
What does it mean when economic profit = 0?
That means that the return to the owner is equal of that of the next best alternative.
Define short run.
At least one of the factors of production are fixed (typically capital).
Define long run.
All factors of production are variable.
Define Production function/theory.
The relationship between the input required to make a good and the quantity of output of that good.
What are the inputs (factors of production) that affect outputs?
- Land, labour, capital, entrepreneurship (profit).
- By convention we focus largely on two - Labour (L) and Capital (K).
- We also need to distinguish between the short run and the long run.
Define Marginal Product (MP).
The extra output produced when the variable factor is increased by one unit.
Define Diminishing Marginal Product/Returns.
When the marginal product of an input declines as the quantity of the input increases.
- assuming labour is homogenous