Production Cost and Profit Flashcards
(20 cards)
What is the primary objective of a firm?
To maximise profit, which is total revenue minus total cost.
What are the two types of costs?
Explicit costs (e.g. wages, materials) and implicit costs (e.g. opportunity cost of owner’s time).
What is economic profit?
Total revenue minus all explicit and implicit costs.
What is accounting profit?
Total revenue minus only explicit costs.
What is the production function?
The relationship between inputs and the resulting output.
What is the difference between short run and long run?
In the short run, at least one input is fixed; in the long run, all inputs are variable.
What is the law of diminishing marginal returns?
Adding more of a variable input to a fixed input will eventually yield smaller increases in output.
What is marginal product of labour (MPL)?
The additional output from one more unit of labour.
What causes the U-shape of marginal cost (MC)?
Increasing MPL initially lowers MC, but diminishing MPL eventually raises it.
What is total cost (TC)?
Sum of total fixed cost (TFC) and total variable cost (TVC).
What is average total cost (ATC)?
Total cost divided by quantity of output (TC/Q).
What is marginal cost (MC)?
The change in total cost from producing one more unit (ΔTC/ΔQ).
What is the long-run average cost (LRAC)?
Shows the lowest cost per unit when all inputs are variable.
What are economies of scale?
Cost advantages from increasing output, reflected in a downward-sloping LRAC.
What are diseconomies of scale?
Rising average costs as output increases, reflected in an upward-sloping LRAC.
Why is MR=MC important?
It represents the output level where profit is maximised.
What does it mean for a firm to be a price taker?
It cannot set prices; must accept the market price.
What is normal profit?
When economic profit is zero; the firm covers all opportunity costs.
What is a quasi-loss?
When price is below ATC but above AVC; firm operates at a loss but covers variable costs.
What is the shutdown point?
When price falls below AVC; the firm minimizes loss by ceasing production.
