Econ: Chapter 13- The Costs of Production

question

Production Function

answer

Relationship between:
-quantity of inputs used to make a good
and
-the quality of output of that good
Gets flatter as production rises

question

Marginal Product

answer

-Increase in output that arises from an additional unit of input
--other inputs constant

question

Marginal product of labor, MPL

answer

MPL= change in Q / change in L
-If Jack hires one more worker, his output rises by the marginal product of labor

question

How are marginal product and production function related?

answer

Can be seen as the Slope of the production function

question

Diminishing Marginal Product

answer

-Marginal product of an input declines as the quantity of the input increases
-Production function gets flatter as more inputs are being used:
--The slope of the production function decreases

question

Why is MPL important

answer

"Rational people think at the margin"
When farmer Jack hires an extra worker:
-His costs rise by the wage he pays the worker
-His output rises by the MPL
-Comparing them helps Jack decide whether he should hire the worker

question

Why MPL diminishes..
Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?

answer

-As Jack adds workers, the avg worker has less land to work with and will be less productive
-In general, MPL diminishes as L rises whether the fixed input is land or capital (equipment, machines, etc.)

question

Marginal Cost, MC

answer

-Increase in total cost arising from an extra unit of production
-Marginal cost= Change in total cost / Change in quantity
-Increase in total cost from producing an additional unit of output

question

Formula for Marginal Cost

answer

MC= change in Total cost/ change in Quantity

question

Fixed costs, FC

answer

Costs that do not vary with the quantity of output produced
-For Farmer Jack, FC = $1000 for his land
-Other examples: cost of equipment, loan payments, rent

question

Variable costs, VC

answer

costs that vary with the quantity of output produced
-For Farmer Jack, VC=wages he pays workers
-Other example: cost of materials

question

Average Total Cost (ATC) formula

answer

ATC= Total cost / Quantity
OR
ATC= AFC + AVC

question

Average Fixed Cost (AFC) formula

answer

AFC= FC/Q

question

Average Variable Cost (AVC) formula

answer

AVC= VC/Q

question

Does ATC lie above or below AVC?

answer

ATC will be above AVC because AVC + AFC= ATC

question

Is AFC above or below ATC?

answer

Below because FC are the same regardless of quantity sold and will always be decreased

question

How does Marginal Cost usually look on a graph?

answer

Usually upward slow, may have a little downward slope initially
-the MC curve crosses the ATC curve at the ATC curve's minimum

question

When MC < ATC, ATC is...

answer

falling

question

When MC > ATC, ATC is...

answer

rising

question

Short Run

answer

-Some inputs are fixed (e.g., factories, land)
-The costs of these inputs are Fixed Costs

question

Long Run

answer

-All inputs are variable (e.g. firms can build more factories or sell existing ones)

question

In the long run..

answer

ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)

question

Economies of scale

answer

Average Total Cost falls as quantity increases
-Long run average total cost falls as the quantity of output increases
--increasing specialization among workers
--More common when Q is low

question

Constant returns to scale

answer

ATC stays the same as Q increases
-Log run average total cost stays the same as the quantity of output changes

question

Diseconomies of scale

answer

ATC rises as Q increases
-Increasing coordination problems in large organization
--e.g., management becomes stretched can't control costs
--More common when Q is high

question

Formula for Economic Profit

answer

Economic Profit=Total revenue - Total cost (including explicit and implicit costs)

question

Formula for Accounting Profit

answer

Total revenue - total explicit costs

question

Is Accounting or Economic profit higher?

answer

Accounting profit because it ignores implicit costs

question

Formula for total revenue

answer

TR= P x Q

question

Explicit Costs

answer

Require an outlay of money-
-rent
-inputs for production
-paying wages to workers

question

Implicit Costs

answer

-Does not require a cash outlay
-value of someones time
-

question

Formula for Total Cost

answer

Total cost=Explicit + Implicit costs
OR
Total cost= Fixed cost + Variable Cost

question

Efficient Scale

answer

the quantity of output that minimizes average total cost

1 of 33

question

Production Function

answer

Relationship between:
-quantity of inputs used to make a good
and
-the quality of output of that good
Gets flatter as production rises

question

Marginal Product

answer

-Increase in output that arises from an additional unit of input
--other inputs constant

question

Marginal product of labor, MPL

answer

MPL= change in Q / change in L
-If Jack hires one more worker, his output rises by the marginal product of labor

question

How are marginal product and production function related?

answer

Can be seen as the Slope of the production function

question

Diminishing Marginal Product

answer

-Marginal product of an input declines as the quantity of the input increases
-Production function gets flatter as more inputs are being used:
--The slope of the production function decreases

question

Why is MPL important

answer

question

Why MPL diminishes..
Farmer Jack's output rises by a smaller and smaller amount for each additional worker. Why?

answer

question

Marginal Cost, MC

answer

-Increase in total cost arising from an extra unit of production
-Marginal cost= Change in total cost / Change in quantity
-Increase in total cost from producing an additional unit of output

question

Formula for Marginal Cost

answer

MC= change in Total cost/ change in Quantity

question

Fixed costs, FC

answer

Costs that do not vary with the quantity of output produced
-For Farmer Jack, FC = $1000 for his land
-Other examples: cost of equipment, loan payments, rent

question

Variable costs, VC

answer

costs that vary with the quantity of output produced
-For Farmer Jack, VC=wages he pays workers
-Other example: cost of materials

question

Average Total Cost (ATC) formula

answer

ATC= Total cost / Quantity
OR
ATC= AFC + AVC

question

Average Fixed Cost (AFC) formula

answer

AFC= FC/Q

question

Average Variable Cost (AVC) formula

answer

AVC= VC/Q

question

Does ATC lie above or below AVC?

answer

ATC will be above AVC because AVC + AFC= ATC

question

Is AFC above or below ATC?

answer

Below because FC are the same regardless of quantity sold and will always be decreased

question

How does Marginal Cost usually look on a graph?

answer

Usually upward slow, may have a little downward slope initially
-the MC curve crosses the ATC curve at the ATC curve's minimum

question

When MC < ATC, ATC is...

answer

falling

question

When MC > ATC, ATC is...

answer

rising

question

Short Run

answer

-Some inputs are fixed (e.g., factories, land)
-The costs of these inputs are Fixed Costs

question

Long Run

answer

-All inputs are variable (e.g. firms can build more factories or sell existing ones)

question

In the long run..

answer

ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)

question

Economies of scale

answer

Average Total Cost falls as quantity increases
-Long run average total cost falls as the quantity of output increases
--increasing specialization among workers
--More common when Q is low

question

Constant returns to scale

answer

ATC stays the same as Q increases
-Log run average total cost stays the same as the quantity of output changes

question

Diseconomies of scale

answer

ATC rises as Q increases
-Increasing coordination problems in large organization
--e.g., management becomes stretched can't control costs
--More common when Q is high

question

Formula for Economic Profit

answer

Economic Profit=Total revenue - Total cost (including explicit and implicit costs)

question

Formula for Accounting Profit

answer

Total revenue - total explicit costs

question

Is Accounting or Economic profit higher?

answer

Accounting profit because it ignores implicit costs

question

Formula for total revenue

answer

TR= P x Q

question

Explicit Costs

answer

Require an outlay of money-
-rent
-inputs for production
-paying wages to workers

question

Implicit Costs

answer

-Does not require a cash outlay
-value of someones time
-

question

Formula for Total Cost

answer

Total cost=Explicit + Implicit costs
OR
Total cost= Fixed cost + Variable Cost

question

Efficient Scale

answer

the quantity of output that minimizes average total cost

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Econ: Chapter 13- The Costs of Production

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