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.
.
A firm's accounting cost is always lower than its economic cost, so its accounting profit is always higher than its economic profit
.
The opportunity cost of the entrepreneur's time is the income he could have earned working for someone else.
.
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.
.
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.
.
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.
.
Diseconomics of scale is caused by what?
cordination problems and higher input costs