Def. fixed costs
costs that do not change with the amount of output produced ex. lease on apartment or rent
Def. variable costs
costs that change with the amount of produced ex. supplies, energy, labor
What are the 2 components of cost?
fixed and variable costs
Def. total cost (TC)
the sum of TFC + TVC
Def. average cost
per unit cost
Formula for TC
TC = TFC + TVC
Formula ATC
ATC= TC/Q
Formula for AVC
TVC/Q
Formula for AFC
TFC/Q
Formula for ATC
ATC = AFC + AVC
Marginal Cost Formula
Change in total cost / change in Q
As long as MC is ___ than AVC, AVC declines.
less
As long as MC is ___ than ATC, ATC declines
less
If the marginal cost is below the average, the marginal "___" the average down
pulls
When MC is _____ than AVC, AVC increases
greater
When MC is _____ than ATC, ATC increases.
greater
MC intersects AVC at _______ AVC
minimum
MC intersects ATC at _______ ATC.
minimum
The MC curve is _________ when it intersects both AVC and ATC.
increasing
Marginal cost falls when the marginal product is rising, and rises when marginal product begins to fall. due to the law of _______ ______
diminishing returns
The average total cost and average variable cost curves get closer together at higher levels of output. The reason is that average fixed cost falls as output rises.
...
In the long run, all factors (costs) are ______.
...
Def. Returns to scale
relationship between inputs and outputs
3 Possibilities for inputs and outputs
increasing returns to scale, constant returns to scale, and decreasing returns to scale
Def. increasing returns to scale (economies of scale)
increasing inputs by some %, and increasing outputs by an even larger % = average costs fall as production (output) increases.
Def. constant returns to scale
increasing inputs by some % and increasing outputs with the same % = average costs remain constant as production (output) increases
Def. Decreasing Returns of Scale (Diseconomies of scale)
increasing inputs by some % but output increases by a smaller %, average costs rise as production (output) increases.
You want to have constant returns of scale. True or False
True
A firm's ability to earn large profit is constrained by:
the technology or production techniques available, the prices of inputs used by the firm, the market price of the good or service sold by the firm
Costs that must be paid in the short run even when no output is produced are called:
total fixed costs
costs that change as the level of output changes are called:
variable costs
What is true in the short run
TFC = TC - TVC
Marginal cost is _______
the change in TC divided by Q, the change in TVC divided by Q, and not affected by the level of fixed costs
If marginal cost is greater than average total cost, then..
average total cost is rising
In the long run:
all inputs are variable, and average costs may decrease, remain constant, or increase as the scale of production changes
The typical pattern is for a firm to experience:
economies of scale intitially, followed by constant returns to scale until reaching a producution level high enough for diseconomies of scale to kick in
Long run average cost curve (LRAC) is U-Shaped due to:
the existence of economies and diseconomies of scale
The downward sloping portion of a LRAC curve implies:
economies of scale exist over that range of output
Diseconomies of scale occur when larger firms have:
communication and monitoring problems
If a firm is experiencing economies of scale, doubling inputs will:
more than double output