Econ 201 ch 7

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  1. explicit cost
    opportunity cost of resources employed by afirm that takes the form of cash payments
  2. implicit cost
    a firms's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment
  3. accounting profit
    a firm's total revenue minus its explicit costs

    this profit is used to determine a firm's taxable income
  4. economic profit
    firm's total revenue minus its explicit and implicit costs

    takes into account the opportunity cost of all resources used in production
  5. normal profit
    accounting profit earned when all resources earn their opportunity cost

    any accounting profit in excess of a normal profit is economic profit
  6. variable resource
    any resource that can be varied in the short run to increase or decrease production
  7. fixed resource
    any resource that cannot be varied in the short run
  8. short run
    • a period during which at least one of a firm's resources is fixed
    • a planning horizon
  9. long run
    a period during which all resources under the firm's control are variable
  10. total product
    a firm's total output
  11. production function
    the relationship between the amount of resources employed and a firm's total product
  12. marginal product
    the change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant
  13. increasing marginal returns
    the marginal product of a variable resource increases as each additional unit of that resource is employed
  14. law of diminishing marginal returns
    as more of a variable resource is added to a given amount of another resource, marginal product eventually declines and could become negative
  15. fixed cost (FC)
    any production cost that is independent of the firm's rate of output
  16. variable cost (VC)
    any production cost that changes as the rate of output changes
  17. total and marginal product of labor
    • when marginal product is rising, total product increases by increasing amounts.
    • When marginal product is falling but still positive, total product increases by decreasing amount.
    • When marginal product equals 0, total product is at a maximum.
    • When marginal product is negative, total product is falling
  18. total cost
  19. marginal cost
    • chang in total cost resulting from a one unit change in output
    • MC=ΔTC/Δq
  20. total and marginal cost curves
    • fixed cost is $x at all levels of output
    • variable cost starts from origin and increases slowly at first as output increases
    • when the variable resource generates diminishing marginal returns, variable cost begins to increase more rapidly
    • total cost is the vertical sum of fixed cost and variable cost
    • marginal cost first declines, reflecting increasing marginal returns, and then increases, reflecting diminshing marginal returns
  21. average variable cost
  22. average total cost
    • ATC=TC/q
  23. average and marginal cost curves
    • average variable cost and average total cost curves first decline, reach low points, and then rise
    • overall they have U shapes
    • when marginal cost is below average variable cost, average variable cost is falling
    • when marginal cost equals average variable cost, average variable cost is at its minimum
    • when marginal cost is above average variable cost, average variable cost is increasing
    • the same is true for marginal cost and average total cost
  24. economies of scale
    • forces that reduce a firm's average cost as the scale of operation increases in the long run
    • a larger size often allows for larger, more specialized machines and greater specialization of labor
  25. diseconomies of scale
    • forces that may eventually increase a firm's average cost as the scale of operation increases in the long run
    • ie as amt and variety of resources employed increases, so does the task of coordinating all the inputs
  26. how is diseconomies of scale differ from diminishing marginal returns
    diseconomies of scale result from a larger firm size, whereas diminishing marginal returns result from using more variable resources in a firm of given size
  27. long-run average cost curve
    short-run average total cost curves form the long-run average cost, or planning, curve
  28. long-run average cost curve
    • a firm's planning curve
    • connects portions of the short-run average cost curves that are lowest for each output rate
    • a curve that indicates the lowest average cost of production at each rate of output when the size or scale of the firm varies
    • each point of tangency between a short-run average cost curve and the long-run average cost curve represents the least-cost way of producing that particular rate of output
  29. constant long-run average cost
    a cost that occurs when, over some range of output, long-run average cost neither increases nor decreases with changes in firm size
  30. minimum efficient scale
    the lowest rate of output at which a firm takes full advantage of economies of scale
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Econ 201 ch 7
2011-05-13 04:23:29

production and cost in the firm
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