Chapter 4 Flashcards
(27 cards)
Economic cost
A payment that must be made to obtain and retain rea source services
Explicit costs
Monetary costs paid to those who supply labour, fuel, materials, transport ect.
- paying to use the resources by others
Implicit costs
Opportunity cost of using your own resources.
Normal profit
Payment made by the firm to obtain and retain entrepreneurial ability.
(The minimum a firm must pay the entrepreneurial ability for it to perform its ability)
Economic profit (pure profit)
Economic profit = total revenue - total costs
Accounting profit
AP = total revenue - explicit cost
Short Run
Period too brief to alter the plant capacity, but long enough to make changes to the degree that the plant is used.
-more staff
-more working hours
-changes are virtually made overnight
Total Product (TP)
Total quantity of output of a particular good or service produced
Marginal Priduct (MP)
Extra output or added product that’s associated with adding an extra unit of resource to the production process.
MP = change in TP / change in Labour Input
Average Product (AP) [aka Labour Productivity]
Output per unit of input
AP = TP /Labour input
Fixed costs (FC)
Total costs do not vary with the changes in output.
Have to be pain even when output is 0.
(Rent, insurance, interest)
Variable costs (VC)
Costs that change with the level of output .
Associated with payments for inputs to the production process
Total costs (TC)
TC = Total fixed costs + Total variable costs
Average Fixed Costs (AFC)
AFC = Total fixed costs / output
Average Variable Costs (AVC)
AVC = TVC / output
Average Total Costs (ATC)
ATC = Total costs / output
Marginal Costs (MC)
Extra cost of producing one more unit of output
MC = change in TC / change in Output
Law of Diminishing Returns
As you add more units of input, marginal product begins to decrease at a certain point
Long Run
Period long enough for a firm to adjust all quantities of resources including plant capacity
Economies of scale (economies of mass production)
As plant size increases, factors will lead to lower average costs of production.
Labour specialization
More available when plant size increases as workers will be able to focus on one aspect of Labour and specialize in it.
Managerial specialization
Managers can manage people grouped by specialization, and becomes specialist managers
Efficient capital
Effective use of expensive extensive equipment that would demand high volumes of output and large scale plants and producers
Diseconomies of scale
Increases in ATC as the firm expands the size of its plant
