Econ ALL UNITS VOCAB OUTLINE

Econ ALL UNITS VOCAB OUTLINE - CHAPTER 8: COSTS AND THE...

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Unformatted text preview: CHAPTER 8: COSTS AND THE SUPPLY OF GOODS THE ECONOMIC ROLE OF COSTS CALCULATING ECONOMIC COSTS AND PROFITS Opportunity Costs: the highest valued alternative forgone b the resource owner when the resource is used (A) explicit cost : payments by a firm to purchase the services of productive resources EX: (B ) implicit costs : OC associated with a firm’s use of resources that it owns .-do not involve a direct money payment EX: wage income, and interest forgone by the owner (C) OC of equity capital : the rate of return that must be earned by investors to induce them to supply financial capital to the firm ECONOMIC VS. ACCOUNTING COSTS Economic Profit: (p. 178) (TR-TC) EX: Normal Profit Rate: zero economic profit -an above normal profit will draw more entry into the market whereas a below normal profit will lead to an exit of investors and capital Accounting Profit: sales revenue-expenses of a firm-no allowance is made for the OC of the equity capital or other implicit costs SHORT-RUN AND LONG-RUN TIME PERIODS Short-run (in production): a time period so short a firm is unable to ary some of its factors of production-plant size can typically not be altered Long-run (in production): time period long enough to allow the firm to vary all of its factors of production CATEGORIES OF COSTS Fixed Cost (FC): TOTAL FIXED COSTS: sum of the costs that do not vary with output Cost of the fixed inputs AVERAGE F.C.: total FC divided by the number of units produced-it always declines as output increses TFC/q *There are no fixed costs in the long run Variable Costs (VC): varies with output level Total Variable Cost (TVC): sum of costs that rise as output increases Ex. Wages paid to workers and payments for raw materials Cost of the variable input Total Cost (TC): includes explicit and implicit costs and sum of the fixed and variable costs at each output level Marginal Cost (MC) (p. 180) the change in total cost required to product an additional unit of output Change in TC/change in outputb Average Variable Cost (AVC): total variable cost/number of units produced Average Total Cost (ATC): total cost/number units produced OUTPUT AND COSTS IN THE SHORT RUN DIMINISHING RETURNS AND PRODUCTION IN THE SHORT RUN Law of Diminishing Returns: as more units of a variable resource are combined with a fixed amt of other resources, eventually increase output at a decreasing rate-once dimishing returns are reached, it will take successively larger amts of a variable factor to expand output by one unit Total Product: total output of a good that is associated with each alternative utilzation rate of a variable input Marginal Product: increase in the total product because a unit increase in the employment of a variable input-ratio of the change in total product to the change in the quantity of the variable input Average Product: total product (output)/number of units of the variable input required to product that output level EX (Table): Units of Labor (per day) Total Product Marginal Product Avg. Product 1 8 2 20 3 34 4 46 5 56 6 64 7 70 8 74 9 75 10 73 EX (Graphical):...
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This note was uploaded on 04/16/2008 for the course ASP 220 taught by Professor Blackguy during the Fall '07 term at WVU.

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Econ ALL UNITS VOCAB OUTLINE - CHAPTER 8: COSTS AND THE...

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