Chapter 9 – Microeconomics

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economic cost

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the payment that must be made to obtain and retain the services of a resource. the sum of explicit and implicit costs.

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explicit costs

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the monetary payments it makes to those from whom it must purchase resources that it does now own. remember that these costs are opportunity costs because every monetary payment used to purchase outside resources necessarily involves forgoing the best alternatives that could have been purchased with the money.

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implicit costs

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the opportunity costs of using the resources that it already owns to make the firm's own product rather than selling those resources to outsiders for cash. present, but not obvious costs. non-expenditure costs.

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accounting profit

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Revenue less Explicit Costs

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normal profit

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the normal amount of accounting profit that you would have earned in another business venture.

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economic profit

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Revenue less Explicit Costs less Implicit Costs. If this is $0.00 you are doing exactly as well as you could in any other business venture. If this is >$0.00 you are doing better than you could in any other business venture. Allocative efficiency increases as firms are led by their profit signals to produce more of what consumers want the most. Simply put, it directs how resources are allocated in the economy.

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short run

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a period too brief for a firm to alter its plant capacity, yet long enough to permit a change in the degree to which the plant's current capacity is used. Fixed Plant Period. However, the firm can vary its output by applying larger or smaller amounts of labor, materials, and other resources to that plant. It can use its existing plant capacity more or less intensively.

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long run

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a period long enough for it to adjust the quantities of all the resources that it employs, including plant capacity. Variable Plant Period. also includes enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry.

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total product (TP)

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the total quantity, or total output, of a particular good or service produced.

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Total Product Curve

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illustrates how total product is related to a variable input. the shape: emerges steeply from 0 then begins to flatten out and drops off.

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marginal product (MP)

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the extra output or added product associated with adding a unit of a variable resource, in this case labor, to the production process.
____________=change in total product/change in labor input

it will ultimately diminish, not because successive workers are less skilled or less energetic, but because the firm is using more workers relative to the amount of plant and equipment available. you will eventually run out of space to work.

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Marginal Product Curve

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shows how marginal product is related to a variable input. is the slope of the total product curve. upward slope is due to increasing marginal returns; downward slope is due to decreasing marginal returns. reflects the law of diminishing marginal returns.
when TP is at a maximum, MP is at 0,
when TP declines, MP becomes negative.

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average product (AP)

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also called labor productivity, is output per unit of labor input:
____________=total product/units of labor

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Average Product Curve

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illustrates how average product is related to a variable input. displays the same tendencies as marginal product.
it increases, reaches a maximum, then decreases as more and more units of variable resources are added.

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law of diminishing returns

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assumes that technology is fixed (techniques of production do not change). States that as successive units of a variable resource (raw materials, energy, labor) are added to a fixed resource (land or capital), beyond some point the extra, or marginal, product that can be attributed to each additional unit of the variable resource will decline.

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fixed costs

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costs that do not vary with changes in output. costs that are incurred at all levels of output, including zero.

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variable costs

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costs that change with the level of output. costs that can be controlled or altered in the short run by changing production levels.

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total cost

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________=total fixed cost + total variable cost
will be different at each level of output

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average fixed cost (AFC)

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________= TFC / Qty
must decline as output increases, because the fixed costs are spread out over a larger and larger output. also referred to as spreading the overhead

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average variable cost (AVC)

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________=TVC / Qty

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average total cost (ATC)

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_______=TC/Qty

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marginal cost

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_______=change in TC/change in Q
the extra, or additional, cost of producing one more unit of output.

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economies of scale or
economies of mass production

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explains the downsloping part of the long-run ATC curve. as plant size increases, a number of factors will for a time lead to lower average costs of production. labor specialization, managerial specialization, efficient capital, learning by doing

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diseconomies of scale

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increases in the ATC of producing a product as the firm expands the size of its plant (output) in the long run

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constant returns to scale

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unchanging ATC of producing a product as the firm expands the size of its plant (output) in the long run

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minimum efficient scale

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the lowest level of output at which a firm can minimize long-run average costs.

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natural monopoly

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a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service

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Fixed Costs (FC)

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those costs that do not vary with changes in output.

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Variable Costs (VC)

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those costs that change with the level of output.

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Total Cost (TC)

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the sum of fixed cost and variable cost at each level of output.

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Average Fixed Cost (AFC)

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__________=TFC/Q

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Average Fixed Cost Curve

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the curve starts out high but falls as output increases because a fixed cost is spread out over more product.

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Average Variable Cost (AVC)

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___________=TVC/Q

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Average Variable Cost Curve

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initially falls because of increasing marginal returns but then rises because of diminishing marginal returns. is generally U shaped. production is relatively inefficient at low levels of production, become more efficient at greater levels of production, but then become inefficient again due to crowding.

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Average Total Cost (ATC)

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___________= TC/Q

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Average Total Cost Curve

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shows the relationships between ATC and qty produced. at small production quantities, the ATC are high, with more production, costs decrease then eventually rise. the vertical sum of AVC and AFC

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Marginal Cost (MC)

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is the extra or additional cost of producing one more unit of output. costs the firm can control directly and immediately.
___________________= change in TC/change in Q

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Marginal Cost Curve

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is a consequence of the law of diminishing marginal returns.
is a mirror image of the marginal product curve.
intersects the AVC and ATC curves at their respective minimum points.
is not related to the AFC curve, because fixed costs do not change with additional output.

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Long-Run ATC Curve

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also called a planning curve. is made up of segments of the short-run ATC curves for the various plant sizes that can be constructed. shows the lowest ATC at which any output level can be produced given time to make adjustments in plant size. is a bumpy curve with a limited number of possibilities. is smooth with unlimited possibilities.

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Long Run Economies of Scale

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contributes to labor specialization, managerial specialization, efficient capital, learning by doing. an increase in all resources will cause a more than proportionate increase in output. lower ATC

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Long Run Diseconomies of Scale

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main factor causing this is the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer. an increase in all inputs will cause a less-than proportionate increase in output. ATC will increase. the rising portion of the long-run cost curves illustrates this.

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Constant Returns to Scale

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a wide range of output may exist between the output at which economies of scale end and diseconomies of scale begin. long-run average cost does not change. an increase in all inputs will cause a proportionate increase in output. ATC is constant.

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Long-Run Minimum Efficient Scale

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the lowest level of output at which a firm can minimize long-run average costs.

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economic cost

answer

the payment that must be made to obtain and retain the services of a resource. the sum of explicit and implicit costs.

question

explicit costs

answer

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implicit costs

answer

question

accounting profit

answer

Revenue less Explicit Costs

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normal profit

answer

the normal amount of accounting profit that you would have earned in another business venture.

question

economic profit

answer

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short run

answer

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long run

answer

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total product (TP)

answer

the total quantity, or total output, of a particular good or service produced.

question

Total Product Curve

answer

illustrates how total product is related to a variable input. the shape: emerges steeply from 0 then begins to flatten out and drops off.

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marginal product (MP)

answer

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Marginal Product Curve

answer

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average product (AP)

answer

also called labor productivity, is output per unit of labor input:
____________=total product/units of labor

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Average Product Curve

answer

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law of diminishing returns

answer

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fixed costs

answer

costs that do not vary with changes in output. costs that are incurred at all levels of output, including zero.

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variable costs

answer

costs that change with the level of output. costs that can be controlled or altered in the short run by changing production levels.

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total cost

answer

________=total fixed cost + total variable cost
will be different at each level of output

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average fixed cost (AFC)

answer

________= TFC / Qty
must decline as output increases, because the fixed costs are spread out over a larger and larger output. also referred to as spreading the overhead

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average variable cost (AVC)

answer

________=TVC / Qty

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average total cost (ATC)

answer

_______=TC/Qty

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marginal cost

answer

_______=change in TC/change in Q
the extra, or additional, cost of producing one more unit of output.

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economies of scale or
economies of mass production

answer

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diseconomies of scale

answer

increases in the ATC of producing a product as the firm expands the size of its plant (output) in the long run

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constant returns to scale

answer

unchanging ATC of producing a product as the firm expands the size of its plant (output) in the long run

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minimum efficient scale

answer

the lowest level of output at which a firm can minimize long-run average costs.

question

natural monopoly

answer

a relatively rare market situation in which average total cost is minimized when only one firm produces the particular good or service

question

Fixed Costs (FC)

answer

those costs that do not vary with changes in output.

question

Variable Costs (VC)

answer

those costs that change with the level of output.

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Total Cost (TC)

answer

the sum of fixed cost and variable cost at each level of output.

question

Average Fixed Cost (AFC)

answer

__________=TFC/Q

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Average Fixed Cost Curve

answer

the curve starts out high but falls as output increases because a fixed cost is spread out over more product.

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Average Variable Cost (AVC)

answer

___________=TVC/Q

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Average Variable Cost Curve

answer

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Average Total Cost (ATC)

answer

___________= TC/Q

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Average Total Cost Curve

answer

shows the relationships between ATC and qty produced. at small production quantities, the ATC are high, with more production, costs decrease then eventually rise. the vertical sum of AVC and AFC

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Marginal Cost (MC)

answer

is the extra or additional cost of producing one more unit of output. costs the firm can control directly and immediately.
___________________= change in TC/change in Q

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Marginal Cost Curve

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Long-Run ATC Curve

answer

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Long Run Economies of Scale

answer

contributes to labor specialization, managerial specialization, efficient capital, learning by doing. an increase in all resources will cause a more than proportionate increase in output. lower ATC

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Long Run Diseconomies of Scale

answer

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Constant Returns to Scale

answer

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Long-Run Minimum Efficient Scale

answer

the lowest level of output at which a firm can minimize long-run average costs.

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Chapter 9 – Microeconomics

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