Production Costs Flashcards
(20 cards)
What are the two main types of economic costs?
Explicit costs (monetary payments) and implicit costs (opportunity costs).
How does a normal profit differ from an economic profit?
Normal profit is an implicit cost (minimum return to retain entrepreneurs), while economic profit is revenue minus all costs (explicit + implicit).
Why might a firm show accounting profit but zero economic profit?
Accounting profit ignores implicit costs (e.g., forgone wages). Economic profit subtracts all opportunity costs.
What is the law of diminishing returns?
Adding more variable inputs (labor) to fixed inputs (capital) eventually reduces marginal product.
Why does the marginal product (MP) curve eventually decline?
Due to overcrowding or inefficient resource use (e.g., workers waiting for machines).
What are the three phases of total product (TP) in the short run?
Increasing returns → Diminishing returns → Negative returns.
How is marginal cost (MC) calculated?
MC = ΔTC / ΔQ (change in total cost per additional unit).
Why is the average total cost (ATC) curve U-shaped?
Initially falls due to spreading fixed costs, then rises due to diminishing returns.
At what point does MC intersect ATC and AVC?
At their minimum points (when MC < ATC/AVC, they fall; when MC > ATC/AVC, they rise).
What causes economies of scale in the long run?
Specialization, efficient machinery, and spreading fixed costs (e.g., large factories).
What is minimum efficient scale (MES)?
The lowest output level where long-run ATC is minimized.
Why do diseconomies of scale occur?
Management complexity, coordination issues (e.g., large firms).
How does a 3-D printer reduce production costs?
Eliminates transportation costs and enables mass customization.
Why do aircraft manufacturers have high MES, while concrete plants have low MES?
Aircraft require massive capital; concrete is local and simple.
What happens to AFC as output increases?
It continuously declines (fixed costs spread over more units).
How do rising fuel prices affect a firm’s cost curves?
Shifts AVC, MC, and ATC upward (higher variable costs).
What is the relationship between MP and MC?
When MP rises, MC falls; when MP falls, MC rises (mirror curves).
Why can’t small firms compete in industries with high MES?
They can’t achieve the low per-unit costs of large-scale production.
How does specialization lower costs in large firms?
Workers focus on one task, improving efficiency (e.g., assembly lines).
What determines whether an industry has many small firms or a few large ones?
The shape of the long-run ATC curve (extended economies of scale favor large firms).
