Economics_Chapter_10_Study_Guide - Karlee Novice Economics...

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Karlee Novice Economics Chapter 10 Study Guide 1) Technology: An Economic Definition a) Technology is the processes a firm uses to turn inputs into outputs of goods and services i) Depends on skill of its managers, the training of its workers and the speed and efficiency of its machinery and equipment. b) Technological change is a change in the ability of a firm to produce a given level of output with a given quantity of inputs. i) Can have positive or negative technological changes due to either new management or more skilled workers, or natural disasters etc. respectively. c) Making the Connection (Improving Inventory Control at Wal-Mart) i) Inventories are goods that have been produced but not yet sold and the goal of firms is balance the amount of inventories they have. They don’t want too many or too little (a shortage leads to a stock out) ii) Improvements in inventory control meet the economic definition of positive technological change because they allow firms to produce the same output with fewer inputs. iii) Just-in time inventory systems is when firms accept shipments from supplies as close as possible to the time they will be needed. 2) The Short Run and the Long Run a) The short run is the period of time during which at least one of the firm’s inputs is fixed. i) The technology and the size of its physical plant are both fixed, while the number of workers are variable. b) The long run is a period of time long enough tot allow a firm to vary all of its inputs, to adopt new technology and to increase or decrease the size of its physical plant. c) The Difference between Fixed Costs and Variable Costs i) Total cost is the cost of all the inputs a firm uses in production. (1) The costs of the fixed inputs are fixed costs and these costs remain constant as output changes (a) Ex: Lease payments for factory or retail space, payments for fire insurance and payments for newspaper and television advertising (2) The costs of the variable inputs are variable costs and these costs change as output changes (a) Ex: labor costs, its raw material costs and its costs of electricity and other utilities ii) Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) d) Implicit Costs vs. Explicit Costs i) Opportunity cost is the highest valued alternative that must be given up in order to engage in an activity. ii) Explicit cost is a cost that involves spending money (1) Sometimes called accounting costs because these are the costs that have
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to be accounted for when paying taxes. (2) Also called economic costs iii) Implicit cost is a nonmonetary opportunity costs. (1) Called economic costs iv) Economic costs are explicit costs + implicit costs. v) Example: Jill owns a copy store (1) Her explicit costs are payments she makes for electricity and paper and the money she gives her workers. (2) Her implicit costs is what she would be making if she still worked for her
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Economics_Chapter_10_Study_Guide - Karlee Novice Economics...

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