CHAPTER 4 Flashcards
Quick Learn (22 cards)
What are economic costs?
Costs that include both explicit and implicit costs
Economic costs arise because resources are scarce and have alternative uses.
Define explicit costs.
Monetary payments made to suppliers of labor, materials, and services
These are cash expenditures for the use of resources by others.
Define implicit costs.
Opportunity costs of using self-owned resources
Implicit costs represent the income that could have been earned in the best alternative use.
What is normal profit?
The minimum income required to retain entrepreneurial ability
It is considered a cost in economic terms.
What is economic profit?
Total revenue minus total costs (explicit and implicit)
Includes normal profit as part of implicit costs.
What is the short run in production terms?
A period too brief for altering plant capacity but allows changes in fixed resource usage
Examples include hiring more workers without changing the facility.
What is the long run in production terms?
A period long enough to adjust all resource quantities, including plant capacity
Firms can enter or exit the market during this time.
Define total product (TP).
Total quantity or total output produced of a good or service
It reflects the overall production level of a firm.
Define marginal product (MP).
The additional output from adding one more unit of a variable resource
Calculated as MP = ΔTP/Δinput.
Define average product (AP).
Output per unit of input
Calculated as AP = TP/input.
What does the law of diminishing returns state?
As more units of a variable resource are added to a fixed resource, the marginal product will eventually decline
This assumes technology remains constant.
What are fixed costs (FC)?
Costs that do not vary with changes in output
They must be paid even if output is zero.
What are variable costs (VC)?
Costs that change with the level of output
They are associated with payments for inputs in the production process.
How is average fixed cost (AFC) calculated?
AFC = TFC/Q
TFC is total fixed cost and Q is the quantity of output.
How is average total cost (ATC) calculated?
ATC = TC/Q
Also represented as ATC = AFC + AVC.
What is marginal cost (MC)?
The extra cost of producing one more unit of output
Calculated as MC = ΔTC/ΔQ.
What is minimum efficient scale (MES)?
The lowest level of output at which a firm can minimize long-run average costs
It indicates the scale at which production becomes efficient.
What are economies of scale?
Factors that lead to lower average costs of production as plant size increases
Includes labor specialization and managerial efficiency.
What are diseconomies of scale?
Factors that lead to higher average costs of production as plant size increases
Challenges in managing a large-scale operation can contribute to this.
What are constant returns to scale?
A situation where a percentage increase in inputs results in the same percentage increase in output
This reflects efficiency in production processes.
What are increasing returns to scale?
A situation where a percentage increase in inputs leads to a larger percentage increase in output
This can occur due to efficiencies gained at larger scales.
What are decreasing returns to scale?
A situation where a percentage increase in inputs results in a smaller percentage increase in output
This often indicates inefficiencies as production scales up.
