Week 6 - Costs Flashcards
(23 cards)
What are accounting costs?
Explicit costs
What are economic costs?
Explicit costs + Opportunity costs (next best option)
What are sunk costs?
unrecoverable expenses that have already occurred
What is the last dollar rule?
Pick a bundle where the last dollar spent on one input gives as much extra output as the last dollar spent on another
What is the Tangency rule?
Pick a bundle of inputs where the isoquant is tangent to isoquant line
What is the lowest isocost rule?
Pick a bundle of inputs where the lowest isocost line touches the isoquant
What is a isocost line?
The line of choices between mixs of capital and labour
- The same as a budget line
What is the isocost equation?
TC = wL + rK
How does a per product tax effect cost curves?
increases AVC and MC (shifts curves)
- Gap between old and new = tax amount
How does a tax of fix costs effect cost curves?
Increases AFV (shifts curve)
- Gap between old and new = tax
What is the cost equation?
TC = FC + VC or TC/q = FC/q + VC/q
What is the MC equation?
MC = dTC/dq = d(FC+VC)/dq = dFC/dq + dVC/dq
What is the average cost equation?
AC = TC/q = FC/q + VC/q = AFC + AVC
Where does MC interest AVC and ATC?
MC intersects at the lowest points of ATC & AVC curves
What is the key assumption of short-Run costs?
At least one cost is held constant
What is the assumption of Long-Run costs?
When do costs enter the long-run?
Both capital and labour are variable
Once both costs are variable
What happens to the isocost line when an input price changes?
It shifts to become tangent with isoquant
Where do the long run cost curves intersect?
LRMC interests LRAC at lowest point
*same as short-run
What is the relationship between LRAC and LRVC?
LRAC = LRVC
What is an economy of scale?
Average cost of production falls as output increases
What is “no Economies of scale”
no change in average cost
What is “diseconomies of scale”
When average cost increases as output increases
What is “economies of scope”?
When it is cheaper to produce two goods together rather than separate
