Lecture 3

Explicit costs

payments the first must make for inputs (labor, capital etc) such as wages and salaries to employees

What are the eplicit costs of going to college?

tuition costs, the cost of books, (costs that are visible)

Implicit costs

non-expenditure costs that occur through the use of self owned, self-employed resources

What are the implicit costs?

costs which is not visible but it is there

Economic profit = ?

Total revenue - total economic costs

Short run

time period that is too breief for a firm to change its plant capactiy and hence output can not be increased much.

What are short-run costs?

the wages, raw materials, etc. used for production in a fixed plant

Long run

period of time long enough for a firm to change the quantities of all inputs/resources including the plant size and hence can easily increase output in the longrun

What are long-run costs?

includes all types of costs, uncluding the cost of varying the size of the production plant

Marginal product of labor

the change in output from one additonal unit of labor

Diminishing returns

As one input increases, output increases at a decreasing rate

Total-product curve

A curve showing the relationship between the quantity of labor and the qwuantity of output produced

Fixed cost

cost that does not vary with the quantity produced. Such Bank loan and its installment

Variable cost

Cost that varies with the quantity produced

Short-run total cost

the total cost of production when at least one input is fixed; exual to fixed cost plus variable cost (curve is U-shaped)

Average fixed cost

fixed cost divided by the quantity produced

Average variable cost

variable cost divided by the quantity produced

Short0run average titak cist

short-run total cost divided by the quanity produced; equal to AFC + AVC

Short-run marginal cost

the change in short-run total cost resulting from a one-unit increase in output

Economies of scale

reduction of average total cost of production with the increase of output in Large Frim

Example of Economies of scale

if a 5 percent increase in all inputs results in a 10 percent increase in output, AC will decrease, so economics of scale

What do economies of scale in production happen?

Due to:
1) Labor specialization
2) Managerial specialization

Labor Specialization

The division of labor into specialized activities that allow individuals to be more productive

Managerial Specialization

Larger firms use management specialists to their best advantage; great efficiency and lower units costs as the net result

Diseconomies of scale

means increase in the average cost of production with the increase of output

Example of Diseconomies of scale

If a 10 percent increase in all inputs result in a 5 percent increase in output, AC will increase

Reasons behind diseconomies of scales

1) Coordination problem
2) Increasing input costs

Coordination problem

Disecomies of scale may offur if a firm becomes too large. In large firm, there lies huge distance between management and the workers. So cost goes up.

Increasing input costs

When a firm increases output, it demands more input. As a result input prices go up. Hence the production cost in the long run goes up, so faces diseconmies of scale

Constant return to scale

will occur when AC is constant over a variety of plant sizes or output (It menas if imput increases by 5 percent, output also goes up by 5 percent)

accounting cost

the explicit costs of production

accounting profit

total revenue minus accounting cost

economic cost

the opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost

economic profit

total revenue minus economic cost

indivisible input

an input that cannot be scared down to produce a smaller quantity of output

marginal product of labor

the change in output from one additional unit of labor

minimum efficient scale

the output at which scale economies are exhausted

total product curve

a curve showing the relationship between the quantity of labor and the quantity of output produced

variable cost

cost that varies with the quanity produced

What is the short-run marginal-cost curve shaped like?

The letter "J

What is the short-run average-cost curve shaped like?

The letter "U

In a psitively sloped portion of the short-run average-cost curve, the effect of _______ dominates the effect of _____.

diminishing marginal returns; falling average fixed cost

Because ___ cost typically exceeds ____ cost, ____ profit typically exceeds ____ profit.

economic; accounting; accounting; economic

If the marginal cost of chairs exceeds the average cost, if you increase the output, the average cost will ____.

increase

When a firm is perfectly flexible in its choice of all inputs, the firm is operating in the ____ run.

long

The presence of indivisible inputs explains the ____ _____ portion of a long-run average-cost curve, and the notion of replication explains the ____ portion of the long-run average-cost curve.

negatively sloped; horizontal

The typical short-run average-cost curve is shaped like the letter U, while the typical long-run average-cost curve is shaped like the letter L because ___ ____ ___ __ not applicable in the ___ run.

diminishing marginal returns are; long

A firm's implicit cost is defined as the ____ cost of nonpurchased inputs, such as the entrepreneur's ___ and ____ ___.

opportunity; time; personal funds

The negatively sloped portion of the short-run marginal-cost curve is explained by ___ ____ ____ and the positvely sloped portion of the marginal-cost curve is explained by ___ ___ ___.

increasing marginal productivity; diminishing marginal returns

If an entrepreneur starts a business with $100,000 from her savings, the opportunity cost is the interest income the funds could have earned.

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A firm's accounting cost is always lower than its economic cost, so its accounting profit is always higher than its economic profit

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The opportunity cost of the entrepreneur's time is the income he could have earned working for someone else.

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Eduard takes 2 hours to cut lawn, cuts 100 per year, equipment could be sold for 20,000 at any time. He could earn 10 per hour as a pedicurist. The intest rate is 10%.

His marginal cost is $20 and his average cost is $40.
If he reduces the # of lawns to 50, his new marginal cost is $20, and his new average cost is $60.

A person quits a job earning $60,000 a year, and starts a business with $100,000 withdrawn from a money-market account earing 15% per year.

The implicit cost of the business is $60,000 for the entrepreneur's time plus $15,000 for the entrepreneur's funds.

The benefit of labor specialization and rising worker productivity is increasing marginal productivity, which causes the marginal-cost curve to be negatively sloped.

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As the firm produces larger quantites of output, diminishing marginal returns will set in and the result is an increasing cost for each additional unit producted. Thus for larger quantities of output, the marginal-cost curve will be positvely sloped.

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The marginal cost curve intersects the short-run average total cost curve at it's minimum point

b/c when marginal cost is less than average cost, average cost is falling. When marginal cost exceeds average cost, average cost is rising

AFC

Change in Total Cost

TC

Fixed Cost + Variable Cost

LAC is LTC divided by output. LTC is the cost of the indivisible inputs plus the VC. VC is 5 per shirt multiplied by the # of shirts produced.

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Diseconomics of scale is caused by what?

cordination problems and higher input costs