Ch. 13 Micro Econ SG

The amount of money that a firm receives from the sale of its output is called total gross profit.

The amount of money that a firm pays to buy inputs is called total cost.

Profit is defined as net revenue minus depreciation.

Net profit can be added to profit to obtain total revenue.

Total revenue equals total output multiplied by price per unit of output.

Those things that must be forgone to acquire a good are called substitutes.

Explicit costs require an outlay of money by the firm.

An example of an explicit cost of production would be the cost of forgone labor earnings for an entrepreneur.

An example of an implicit cost of production would be the income an entrepreneur could have earned working for someone else.

Accountants are primarily interested in the flow of money into and out of firms.

John owns a shoe-shine business. His accountant most likely includes wages John could earn washing windows.

The cost of accounting services would be regarded as an implicit cost

Economic profit is equal to total revenue minus the explicit cost of producing goods and services.

Accounting profit is equal to marginal revenue minus marginal cost.

Economic profit will never exceed accounting profit

To an economist, it is conceivable that the objective that motivates an individual entrepreneur to start a business arises from an innate love for the type of business that he or she starts.

When a firm is making a profit-maximizing production decision, the cost of something is what you give up to get it is likely to be most important to the firm's decision

A production function is a relationship between inputs and quantity of output.

The marginal product of labor is equal to the incremental cost associated with a one unit increase in labor.

The marginal product of labor can be defined as change in profit/change in labor.

One would expect to observe diminishing marginal product of labor when crowded office space reduces the productivity of new workers.

When adding another unit of labor leads to an increase in output that is smaller than increases in output that resulted from adding previous units of labor, we have the property of diminishing labor.

As the number of workers increases, total output increases, but at a decreasing rate.

With regard to cookie production, the figure implies diminishing marginal product of workers.

For a firm that uses labor to produce output, the production function depicts the relationship between the quantity of labor and the quantity of output.

The firm can vary the number of workers it employs, but not the size of its factory, this assumption is often realistic for a firm in the short run.

Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of its factory as fixed. This assumption is often realistic in the short run, but not in the long run.

The marginal product of an input in the production process is the increase in total revenue obtained from an additional unit of that input.

A total-cost curve shows the relationship between the quantity of an input used and the total cost of production.

Average fixed costs do not vary with the amount of output a firm produces.

Fixed costs can be defined as costs that vary inversely with production.

Suppose Jan is starting up a small lemonade stand business. Variable costs for Jan's lemonade stand would include the cost of building the lemonade stand.

If a firm produces nothing, total costs will be zero.

One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit-maximizing firm is that in the short run, output is not variable.

The cost of producing the typical unit of output is the firm's average total cost.

Average total cost is equal to output/total cost.

The amount by which total cost rises when the firm produces one additional unit of output is called average cost.

The cost of producing an additional unit of output is the firm's marginal cost.

Variable cost divided by quantity produced is average total cost.

Average total cost tells us the total cost of the first unit of output, if total cost is divided evenly over all the units produced.

Marginal cost tells us the value of all resources used in a production process.

If marginal cost is rising, average variable cost must be falling.

Diminishing marginal product suggests that the marginal cost of an extra worker is unchanged.

Diminishing marginal product suggests that additional units of output become less costly as more output is produced.

The average fixed cost curve always declines with increased levels of output.

Average total cost is very high when a small amount of output is produced because average variable cost is high.

The efficient scale of the firm is the quantity of output that maximizes marginal product.

When marginal cost is less than average total cost, marginal cost must be falling.

When marginal cost exceeds average total cost, average fixed cost must be rising.

Average total cost is increasing whenever total cost is increasing.

Marginal cost is equal to average total cost when average variable cost is falling.

The marginal cost curve crosses the average total cost curve at the efficient scale.

If marginal cost is below average total cost, then average total cost is constant.

At all levels of production beyond the point where the marginal cost curve crosses the average variable cost curve, average variable cost rises.

Total cost can be divided into two types. Those two types are fixed costs and variable costs.

Some costs do not vary with the quantity of output produced. Those costs are called marginal costs.

When marginal cost is less than average total cost, average total cost is rising.

The firm's efficient scale is the quantity of output that minimizes average total cost.

Harry's Hotdogs is a small street vendor business owned by Harry Huggins. Harry is trying to get a better understanding of his costs by categorizing them as fixed or variable. The cost of mustard are most likely to be considered fixed costs.

When a firm is able to put idle equipment to use by hiring another worker, variable costs will rise.

When a firm is operating at an efficient scale, average variable cost is minimized.

Marginal cost must rise as the quantity of output increases.

The marginal cost of the fifth unit of output equals the total cost of five units minus the total cost of four units.

When marginal cost is rising, average variable cost must be rising.

One of the most important properties of cost curves is that for most producers, the average total cost curve never crosses the marginal cost curve.

When a factory is operating in the short run, it cannot alter variable costs.

In the long run, inputs that were fixed in the short run remain fixed.

The long-run average total cost curve is always flatter that the short-run average total cost curve, but not necessarily horizontal.

The length of the short run is different for different types of firms.

Economies of scale occur when long-run average total costs rise as output increases.

Diseconomies of scale occur when average fixed costs are falling.

Constant returns to scale occur when long-run total costs are constant as output increases.

Specialization among workers occurs when quality management allows workers to switch from one task to another.

If a firm wants to capitalize on economies of scale, it may be able to do so by assigning limited tasks to their employees, so they can master those tasks.

In reference to setting the production level, a firm's cost curves by themselves do not tell us what decisions the firm will make.

Economies of scale arise when an economy is self-sufficient in production.

It takes a firm six months to go from the short run to the long run.

In the long run, a firm that produces and sells computers gets to choose how many workers to hire, the size of its factories, and which short-run average-total-cost curve to use.

When, for a firm, long-run average total cost decreases as the quantity of output increases, we have a situation of economies of scale.

"Constant returns to scale" refers to a situation in which, for a firm, all of the firm's short-run average total cost curves are horizontal.

Long-run average total cost curves are often U-shaped for the same reasons that average total cost curves are often U-shaped