chapter 7 Flashcards
(29 cards)
explicit costs
involve a direct monetary outlay
Implicit costs:
Costs that do not involve outlays of cash
info you know
opp cost
The value of a resource in its best alternative use
2nd best choice = best alternative = opp cost
Economic costs:
Sum of a firm’s explicit costs and implicit costs
Accounting costs:
Total of a firm’s explicit costs
sunk costs
costs that must be incurred no matter what the decision
unaviodable
Non sunk costs:
costs that must be incurred only if a particular decision is made
aviodable
Cost minimization problem:
Finding the input combination that minimizes a firm’s total cost of producing a particular level of output
Cost minimization firm:
firm that seeks to minimize the cost of producing a given amount of output
Long run
period of time when the quantities of all of the firm’s input can vary
short run
period of time when at least one of its inputs’ quantities is fixed
isocost line
Set of combinations of labor and capital (L,K) that have the same total cost for the firm
slope of isocost line =
-w/r
optimality condition
MPL / w = MPK / r
Comparative Statics
change in the relative price of inputs changes the slope of the isocost line
Smooth isoquant lines (no kinks) with DMRTS, an increase in price of input will…
cause cost min quantity of input to go down
Firm using zero quantity of the input or has fixed proportion prod function, increase in input will …
leave cost min input quant unchanged
Expansion path:
line that connects the cost-minimizing input combinations as the quantity of output, Q,
normal inputs
input whose cost-minimizing quantity increases as the firm produces more output
Inferior input:
n input whose cost-minimizing quantity decreases as the firm produces more output
can both inputs be inferior?
no
normal inputs the expansion path is … as output increases
upward sloping
inferior inputs output increases and expansion path is ….
downward sloping
input demand
function that shows how the firm’s cost-minimizing quantity of input varies with the price of that input
