Cost Minimization and Profit Maximization Flashcards Preview

Economics > Cost Minimization and Profit Maximization > Flashcards

Flashcards in Cost Minimization and Profit Maximization Deck (22):
1

Firm Designs

What is produced? Is it different from the competitors?

2

Firm Produces

How are goods produced? How much is produced?

3

Firm Sells

At which price?

4

Equimarginal Principle

Principle that an activity should be pursued to the point where marginal benefits equal marginal costs

5

Marginal Benefits (MB)

The additional benefits gained from the last unit of activity

6

Marginal Costs (MC)

The additional costs associated with the last unit of an activity

7

Decision Making

Weigh the costs and benefits that vary with the consequence of a decision and only costs and benefits that vary with the decision.

8

Fixed Cost Fallacy

You consider costs and benefits that do not vary with the consequences of your decision, you make decisions using irrelevant costs and benefits

9

Fixed Cost Fallacy Example

Overhead is a fixed or sunk cost. Do not vary with outpout decisions and should be ignored in the decision-making process

10

Big Fixed Cost

If the "overhead" charge is big enough to deter an otherwise profitable product launch, you commit the fixed-cost fallacy

11

Overhead charges are analogous to

a "tax" on launching a new product

12

Hidden-Cost Fallacy

It occurs when you ignore relevant costs, i.e., those costs that do vary with the consequences of your decision

13

Slope of the (Total) Revenue Curve

Marginal Revenue

14

Fixed Costs

Costs that do not vary with the quantity of output. Fixed costs are avoidable only in the long run

15

Variable Costs

Costs that vary with the quantity of output. Variable costs are avoidable

16

Marginal Costs

The additional costs assocaited with the last unit of an activity

17

Increasing Marginal Costs

The condition where each additional unity of an activity is more expensive than the last

18

Sunk Costs

A cost that can no longer be avoided. Once they are sunk they are irrelevant to any future decision making and should not be accounted for in market exit decisions

19

Implicit Costs

a.

20

Explicit Costs

b.

21

Opportunity Costs

Equal to the value of a foregone opportunity. The cost of a item, or project, is what you give up to get that item, or undertake that project.

22