Costs of Production Flashcards
When an economist uses the term “cost” referring to a firm, the economist is talking about the ______
Opportunity cost of producing a good or service, which includes BOTH implicit and explicit costs
What is a implicit cost?
The value of an opportunity that was given up or not pursued, the ‘what if?’
EX: Choosing to not become a doctor that earns 100k per year, interest lost when using savings to open a new business
What is an explicit cost?
Anything a firm HAS to pay money for
EX: rent, electricity, employees
Accounting Profit includes
ONLY explicit costs
Can accounting profit be POSITIVE and economic profit NEGATIVE?
Yes because accounting profit is MORE than the explicit costs. But for economic profit, it is LESS than both implicit and explicit costs (or the opp cost)
What is Marginal Product?
The change in output (or the Total Product)
EX: When the # of workers increase from 1 to 2, cookie production increases from 50 to 90. The marginal product of the SECOND worker would be 40 cookies. 90-50=40
What is Marginal Cost?
Change in Total Cost that arises from an extra unit of production
What happens to the average product when marginal product is ABOVE average product?
Average Product is increasing
What happens to the average product when marginal product is BELOW average product?
Average Product is decreasing
In the long run, all costs are
Variable, because the producer needs to have flexibility over all relevant production decisions
What is the Variable Cost when the output is zero?
There isn’t any variable costs
Why is Average Fixed Cost always decreasing?
* FC/Q
Because, you are always dividing by a bigger and bigger number. Quantity is increasing which makes the number bigger
What is Economies of Scale?
The Long Run Average Total Cost FALLS as the quantity of output INCREASES
What is Diseconomies of Scale?
The Long Run Average Total Cost RISES as the quantity of output INCREASES
If you DOUBLE all inputs and outputs DOUBLES, you’re looking at
Constant Return to Scale
