Economic costs and profits Flashcards
(27 cards)
What do time periods determine?
the types of costs you have
What defines a short-run time period?
some variable costs, BUT because one input is fixed the firm will always face at least ONE fixed cost
- at least one input is fixed
What defines a long-run time period?
all inputs are variable, only has variable costs
Define variable cost
changes with output.
Increase in output = increase in variable cost
If output is 0, variable cost will be 0 (e.g. casual labor)
Define Fixed cost
does not change with output
If output is 0, you still have to pay the fixed cost (e.g. a lease on a factory for a specific time period)
How do you calculate total cost?
Total fixed cost + total variable cost
How can we tell immediately if we are looking at long-run?
If the first column for fixed costs has 0 when producing an output of 0, it shows immediately it is the long-run (all inputs are variable)
How do you calculate Average Variable Cost (AVC) ?
total variable cost / output (total product)
How do you calculate Average Cost (AC)?
Total cost / output (total product)
How do you calculate Marginal Cost (MC)?
Δ Total cost / Δ output (total product)
(Δ in output is called the marginal product in labor market questions)
Define Marginal product
Change in total product
Define increasing returns
Initially, when output increases (Marginal Product by a larger amount when another unit of labor is hired)
Define diminishing returns
At some point the additions to output (Marginal Product) start to decrease
What do increasing and diminishing returns define?
The shape of our cost curves
What does the Marginal Cost Curve (MC) help us work out?
the quantity of output to produce
What does the Average Cost Curve (AC) help us work out?
how much profit is being made at that output
What is the shape of AC (Average Cost Curve) driven by?
The marginal cost curve (MC)
How does MC (marginal cost curve) interact with AC (Average Cost Curve)
Whether MC is > or < AC, determines the slope of the AC curve
Initially the marginal cost is less than the average cost, so your average cost is being pulled down (MC < AC)
Once MC is cut by the AC curve, MC is now greater than AC and is pulling it up, so AC is rising (MC > AC)
How do you calculate Average cost (AC)?
AC = Average variable costs (AVC) + Average fixed costs (AFC)
What is ‘spreading the overhead’?
AVC gets closer to AC as output increases as the Average Fixed Costs are smaller (AFC is being spread across a greater amount)
What happens when variable costs change?
AC, MC, and AVC will all shift.
What happens when fixed costs change?
only the AC curve will shift
What is the difference between accounting costs and economic costs?
Economic costs include the opportunity cost as well as the running cost in the decision-making process
How do you calculate an economic profit?
Revenue - Economic costs
