Cost and supply decisions Flashcards
(21 cards)
Revenues
The amount a firm earns by selling goods and services in a given period
Costs
Expenses incurred in producing goods and services during a period
Accounting cost
actual payments made by a firm in a period
Opportunity cost
amount lost by not using a resource in it’s best alternative use
Economic costs
relate to all costs incurred by the firm: includes the opportunity costs
Supernormal profit
pure profit accruing to the owners after allowing for all economic costs
Marginal cost
the rise in total cost if output rises by 1 unit
Marginal revenue
rise in total revenue if output rises by 1 unit
How to firms maximise profit?
Profits are maximised when MR = MC, as long as the firm covers variable costs
Name 3 sources of finance
Borrowing from banks.
Selling corporate bonds whereby the firm promises to pay interest for a specific period and then repay the debt.
Using the stock market to sell new shares.
What is the production function?
the amount of output produced depends upon the inputs used in the production process
Short-run vs. long-run
The short run is the period in which a firm can make only partial adjustments of inputs.
The long run is the period in which a firm can adjust all inputs to changed conditions
Average cost
Total cost/level of output
Economies of scale
Occur when LRAC decline as output rises
Decreasing returns to scale
when LRAC rise as output rises
Constant returns to scale
when LRAC are constant as output rises
Long-run output decisions
If the price is above LRAC, the firm produces the quantity demanded.
If the price is below LRAC, the firm goes out of business.
Fixed costs
costs that don’t vary with output levels
Variable costs
costs that do vary with output levels
The marginal product of labour
the increase in output obtained by adding 1 unit of the variable factor (1 employee_, but holding constant the inputs of other factors.
The law of diminishing returns
Holding all factors constant except 1.
further increases in the variable lead to steadily decreasing marginal product of that input
