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Econ 1 Ch 9
Production Costs
74
Other
Undergraduate 1
07/05/2011
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Term
Fixed Cost (FC) (define)
 Definition
a cost of production that does not change
Term
Total Fixed Costs (TFC) (define)
 Definition
Sum of all fixed costs of production.
these costs do not change with the amount or ate of the firm's production. (such as rent)
TFC = TC-TVC
Term
Total Cost (TC) (define)
 Definition
sum of fixed cost and total variable cost

These costs are determined by adding the Total Fixed Costs and the Total Variable Costs
TC=TFC+TVC
Term
Variable Cost (VC) (define)
 Definition
a cost of production that vary depending on how much produced
Term
Total Variable Cost (TVC) (define
 Definition
Sum of all Variable Costs of productions.

also, increases slowly up to point A, then increases quickly due to the Law of Diminishing Returns.

These costs vary according to how much the firm produces. Such as seeds, fertilizer and water for a farmer.
TVC = TC-TFC
Term
Total Costs (TC) (define)
 Definition
Sum of Total Fixed Costs and Total Variable Costs of production
Term
Average Fixed Cost (AFC) (define)
 Definition
the way, on average, that the Total Fixed Costs change with change in Production. *will continue to decline as more units are produced. Will never have a minimum point, will never reach zero.
formula: Total Fixed Costs/# units Produced

AFC=TFC/Q
Term
Average Variable Costs (AVC) (define)
 Definition
the way, on average, that the Total Variable Costs change with change in Production.
formula: Total Variable Costs/# units Produced. *will first decline because each extra worker produces more than the previous worked (increasing marginal returns), then when a minimum reached, will start to increase because each extra worker added from that point produces less than the previous one (Law of Diminishing Returns).

AVC=TVC/Q
Term
Average Total Cost (ATC) (define)
 Definition
Reflects the way, on average, that Total Cost change with change in Production.

Formula: Total Cost/# units Produced
Term
Total Revenue (formula)
 Definition
TR - Q x P
Total Revenue = Quantity x Price
Term
Quantity (Q) (define)
 Definition
# of units produced
Term
Price (P) (define)
 Definition
Price per unit
Term
Explicity Costs (define)
 Definition
'out of pocket expenses', The actual payments a firm makes to its suppliers of inputs (i.e., land, labor and captial).
Term
Opportunity Cost Doctrine
 Definition
assumption that explicit costs paid is the highest price in the market and the best price available.
Term
Implicit Costs
 Definition
'opportunity costs'. The costs of using owners' own resources in their business as compared to the best alternatives available. The costs are calculated as the best alternative foregone.

The opportunity costs of all the resources (i.e., land, labor and captial) that are supplied by the firm's owner(s).
Term
Name the 3 types of Profit
 Definition
Account
Economic
Normal
Term
Accounting Profit (define)
 Definition
calculated by subtracting explicit costs from total revenue.

Formula: AP - TR-EC
Term
Economic Profit (define)
 Definition
is calculated by subtracting both explicit and implicit costs from total revenue.

Formula: EP = TR - (Explicit Costs +Implicit Costs)
Term
Normal Profit (define)
 Definition
= to implicit costs. Only the profit which a firm earns equal to the opportunity cost of the resources contributed by the owners.

Formula: NP = Accounting Profit - Economic Profit or

Normal Profit - (TR-Explicit Costs) - TR-Explicit Costs-Implicit Costs) or

Normal Profit - Implicit Costs
Term
Name 3 types of Short-run Costs
 Definition
Total Fixed Costs
Total Variable Costs
Total Costs
Term
TFC, TVC and TC have a geometric relationship

True or False
 Definition
True
Term
The Law of Diminishing Returns
 Definition
progressive decrease in the marginal (per-unit) output of a production process as the amount of a single factor of production is increased, while holding the amounts of all other factors of production constant.
Such as more works may increase production, but too many will become inefficient.
Book: "each work produces less after point A than the previous worker, thus the TVC increases at an inreasing rate after paint A.
Term
Marginal Costs (define)
 Definition
how total costs change with each extra unit produced
Term
Output (aka)
 Definition
Quantity (Q)
Term
Costs per-unit of Output in the Short-run (define)
 Definition
average costs change as output (q) changes.

Average Fixed Costs (AFC) AFC = TFC/Q

Average Variable Costs (AVC) AVC = TVC/Q
Term
Increasing Marginal Returns
 Definition
Term
SRAC (stands for)
 Definition
Short Run Average Costs
Term
LRAC (stands for)
 Definition
Long Run Average Costs
Term
tangent (define)
 Definition
just touching
Term
LRAC is tangent to
 Definition
all the SRAC curves (short run average costs curve options for one firm.
Term
Three rules of the LRAC graphic expression
 Definition
No SRAC can lie below the LRAC. 2. The LRAC is tangent to the SRAC curves and shows the minimum cost of producing each unit from the respective short run average cost curve. 3. The LRAC just touches the minimum points of only those SRAC curves there the long-run is horizontal.
Term
The horizontal part of the LRAC that just touches the minimum points of the SRAC curves is called
 Definition
constant returns to scale.
Term
Constrant Returns to scale (define)
 Definition
the horizontal portion of teh LRAC that just touches the minimum points of the possible SRAC curves
Term
the lowest point of the SRAC curve is called
 Definition
the optimum rate of output
Term
The optimum rate of output (define)
 Definition
the lowest point on an SRAC curve. also the lowest ATC (Average Total Cost).
Term
Optimum scale of plant (define)
 Definition
the point at which the SRAC and the lowest point of the LRAC meet.
Term
Economies of scale (define)
 Definition
long run concept in which producers can change all costs to ensure the lowest per unit cost
Term
As output changes how does LRAC (Long run average cost) respond
 Definition
as output increases, LRAC decreases (this state is known as increasing returns to scale or economies of scale. 2. Then LRAC becomes constant. this state is known as Constant Returns to Scale. 3. Eventually LRAC increases with output. This state is known as Decrease Returns to Scale or Diseconomies of Scale.
Term
Decreasing Returns to Scale (define)
 Definition
the state in which LRAC (Long Run Average Cost) increases with output.
Term
Diseconomies of Scale (define)
 Definition
the state in which LRAC (Long Run Average Cost) increases with output.
Term
Constant Returns to Scale (define)
 Definition
The point at which LRAC (Long run Average Costs) is constant as output increases.
Term
Economies of Scale (define)
 Definition
The state at which LRAC (Long Run Average Costs) decreases as output increases.
Term
Economies of Scale (define)
 Definition
The state at which LRAC (Long Run Average Costs) decreases as output increases.
Term
LRMC (stands for)
 Definition
Long Run Marginal Cost
Term
LRTC (stands for)
 Definition
Long Run Total Cost
Term
LRAC = (formula)
 Definition
LRTC/Output aka LRTC/Q aka Long-run Total Costs/Q
Term
LRTC = (formula)
 Definition
LRAC x Output aka Long-run Average Costs x Output aka LRAC x Q
Term
LRMC = (formula)
 Definition
change in Long-run Total Cost/Change in Output aka change in LRTC/Change Q
Term
in Increasing returns to Scale the LRTC ______
 Definition
increases at a decreasing rate.
Term
In increasing Returns to Scale the LRAC is ______ the LRMC
 Definition
above
Term
In constant Returns to Scale the Lrac ____ the LRMC
 Definition
equals
Term
If LRAC = LRMC, then the state is
 Definition
Constant Returns to Scale
Term
If LRMC is < LRAC, then the state is
 Definition
Increasing Returns to Scale
Term
If LRMC is > LRAC, then the state is
 Definition
Diseconomies of Scale
Term
If LRTC increases at a constant rate then the state is
 Definition
Constant Returns to Scale
Term
If LRTC increases at an increase rate, then the state is
 Definition
Diseconomies of Scale
Term
In Diseconomies of Scale the LRTC _____
 Definition
increases at an increasing rate
Term
In a state of Constant Returns to Scale, the LRTC
 Definition
increases at a constant rate
Term
Dimensional Factor (define)
 Definition
one of two explination of economies of scale. As output increases, firms can upgrade, thereby allowing output to increase
Term
Specialization define)
 Definition
one of two explinations of economies of scale. Fewere works must perform many tasks, as workforce increases workers can focus on a specific task thereby becoming more efficient.
Term
Name two reasons for economies of scale
 Definition
1. specialization 2. dimensional factors.
Term
Name 1 reason for diseconomies of scale
 Definition
managerial layers
Term
Managerial Layers (define)
 Definition
the reason for diseconomies of scale. As firms get bigger, it hires more and more managers. Managers increase average cost faster than they increase output.
Term
Would a firm operate in a diseconomy of scale
 Definition
yes, as with monopolies. Pharmaceutical firms can operate in decreasing returns to scale, yet enjoy huge profits.
Term
When MC (Marginal Cost) decreases: AVC ______, AFC _______, and ATC _______
 Definition
AVC decrease, AFC decreases and ATC decreases
Term
When MC (Marginal Cost) is minimum: AVC ______, AFC _______, and ATC ______
 Definition
AVC (Average Variable Cost) decreases, AFC (Average Fixed Cost) decreases, and ATC (Average Total Cost) decreases
Term
When MC (Marginal Cost) increases: AVC ________, AFC ______, and ATC ________
 Definition
AVC (Average Variable Cost) decreases, then increases, AFC (Average Fixed Costs) decreases and ATC (Average Total Cost) decreases, then increases
Term
When AVC (Average Variable Cost) decreases: MC ______, AFC _______, and ATC ______
 Definition
MC (Marginal Costs decreases, then increases, AFC (Average Fixed Cost) decreases, and ATC (Average Total Cost decreases.
Term
When AVC (Average Variable Cost) is minimum: MC ____, AFC ____ and ATC ____
 Definition
MC (Marginal Costs increases, AFC (Average Fixed Cost) decreases, and ATC (Average Total Cost increases.
Term
When AVC (Average Variable Costs increases: MC _____, AFC ______, and AVC ______
 Definition
MC (Marginal Costs increases, AFC (Average Fixed Cost) decreases, and ATC (Average Total Cost increases.
Term
When ATC (Average Total Cost) decreases: MC ______, AFC _____, and AVC _______.
 Definition
MC (Marginal Cost) decreases, then increases, AFC (Average Fixed Cost) decreases and AVC (Average Variable Cost) decreases, then increases.
Term
When ATC (Average Total Cost is minimum: MC ____, AFC _____ and AVC _____.
 Definition
MC (Marginal Cost) increases, AFC (Average Fixed Cost) decreases and AVC (Average Variable Cost) increases.
Term
When ATC (Average Total Cost increases: MC ____, AFC _____ and AVC _____.
 Definition
MC (Marginal Cost) increases, AFC (Average Fixed Cost) decreases and AVC (Average Variable Cost) increases.
Term
MC (Marginal Cost) decreases as MPP (Marginal Product Price)_______
 Definition
increases
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