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This 0 page Study Guide was uploaded by Oleta Friesen on Sunday November 1, 2015. The Study Guide belongs to ECO201 at Miami University taught by WilliamEven in Fall. Since its upload, it has received 21 views. For similar materials see /class/233359/eco201-miami-university in Economcs at Miami University.
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Date Created: 11/01/15
Explicit Cost 0 Opportunity cost of resources employed by a rm that takes the form of cash payments I Wages I Rent I Interest I Insurance I Taxes etc Implicit Cost 0 A rm s opportunity cost of using its own resources or those provided by its owners without corresponding cash payment I Require no cash payment or entry in the rm s accounting statement 0 Company owned building 0 Company funds 0 Time of the rm s owners Accounting Pro t 0 A rm s total revenue minus its explicit costs I Ignores opportunity cost Economic Pro t 0 0 Total revenue minus all costs both implicit and explicit I Takes into account the opportunity cost of all resources used in production I Anyaccountmgprofit 13911 eXcess ofa normal profit I As long as economic pro t is positive the entrepreneur is better off running his own business than working for someone else Normal Pro t 0 The accounting pro t earned when all resources earn their opportunity cost I Normal pro t is earned when accounting pro t equals implicit costs 0 The sum of a salary given up to pursue your own rm s establishment Variable Resource 0 Any resource that can be varied in the short run to increase or decrease production I Labor Fixed Resource 0 Any resource that cannot be varied in the short run I Building Size Short Run 0 A period during which at least one ofa rm s resources is xed Long Run 0 A period during which all resources under a rm s control are variable Production Function 0 The relationship between the amount of resources employed and a rm s total product Marginal Product 0 The change in total product that occurs when the use of a particular resource increases by one unit I The rate of change of production I First Derivative oftbe Production Function o 0 Increasing Marginal Returns 0 The marginal product of a variable resource increases as each editional resource is employed Law of Diminishing Marginal Returns 0 As more of a variable resource is added to a given amount of another resource marginal product eventually declines and could become negative I Shown by the graphs of the production function and the graph of the marginal product I First derivative relationship 0 Marginal product graph graphs the value of the slope of the production function and shows how it changes over time Fixed Cost 0 Any production cost that is independent of the f1rm s rate of outputproduction Variable Cost 0 Any production cost that changes as the rate of output changes Total Cost 0 The sum of the fixed cost and the variable cost FCTC Marginal Cost 0 Rate of change of the total cost function 0 Graphs the cost incurred in producing an additional unit of product I The first derivative of total cost is a good approximation 0 Total Cost CX 8000200X02X2 o Marginal Cost C X20004X I Die slope of the total cost curve at each rate of output equals the marginal cost at ratrate of output 0 MC curve intersects AVC curve and AT C curve at their minimum points Average Fixed Cost 0 The distance between the AVC curve and the ATC curve I Gets smaller as rate of output increases Average Variable Cost 0 Variable cost divided by Output AVC VC q Average Total Cost 0 Total cost divided by output ATC TCq o The sum of average fixed cost and average variable cost ATC AFC AVC Relationship between Marginal cost and Average cost 0 Marginal cost is to average cost as your term grade is to your GPA I MC AC as I Term grades GPA 0 Because marginal cost is below average cost marginal cost pulls down average cost 0 When marginal cost exceeds average cost marginal cost pulls average cost up 0 At low rates of output marginal cost declines as output expands because of increasing marginal returns from labor 0 As long as marginal cost is below average cost marginal cost pulls down average cost as output expands 0 At higher rates of output marginal cost increases because of diminishing marginal returns from labor I Ihe shapes of the A VC curve and the AT C curve are determined bythe shape of the MC curve Economies of Scale 0 Forces that reduce a rm s average cost as the scale of operation increases in the long run I Larger size allowing for more specialized machines greater specialization of labor I Assembly line 0 As the size of a rm increases capital substitutes for labor and complex machines substitute for simpler ones Diseconomies of Scale 0 Forces that may eventually increase a rm s average cost as the scale of the operation increases in the long run I As the amount of resources and variety of resources employed rises so does the task of coordinating all these inputs 0 Additional layers of management 0 Communications may get mangled and become more dif cult Longrun Average Cost Curve 0 A curve that indicates the lowest average cost of production at each rate of output when the size or scale of the rm varies also called the planning curve I Formed by connecting the points on various shortrun AC curves that represent the lowest perunit cost for each rate of output 0 These points of tangency represent the leastcost way of producing each particular rate of output given resource prices and technology available 0 Constant Longrun Average Cost 0 A cost that occurs when over some range of output longrun average cost neither increases nor decreases with changes in the size of the rm Minimum Efficient Scale 0 The lowest rate of output at which a rm takes full advantage of economies of scale I The lowest rate of output at which longrun average cost is at a minimum
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