PEco Module 10

• The opportunity cost of production is important in understanding a firm's behavior.
• Different measures of cost and cost movement can be calculated during the short run and long run.
• Diseconomies of scale can arise because of coordination problems that are inherent in any large organization.
• The more cars Ford produces, the more stretched the management team becomes, and the less effective the managers become at keeping costs down.
• The cost of production gives a better understanding of the decisions behind the supply curve.
• The study of how firms’ decisions about prices and quantities depend on the market conditions they face is known as industrial organization.
• Total revenue is the amount a firm receives for the sale of its output, calculated as Sold Quantity x Selling Price per Unit.
• Total cost is the market value of the inputs a firm uses in production, calculated as Fixed Cost + (Variable cost x Quantity).
• Profit is calculated as Total revenue minus total cost, represented as P = TR-TC.
• Economists normally assume that the goal of a firm is to maximize profit, and they find that this assumption works well in most cases.
• The cost of capital is an important implicit cost of almost every business, representing the opportunity cost of the financial capital that has been invested in the business.
• Economic Profit is a firm’s total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold.
• Accounting Profit is a firm’s total revenue minus only the firm’s explicit costs.
• Active learning involves a firm having sales revenue of $1 million last year, spending $600,000 on labor, $150,000 on capital and $200,000 on materials.
• The opportunity cost of production can be calculated as the forgone income from an alternative use of resources.
• The cost of production includes all the opportunity costs of making a firm's output of goods and services.
• Explicit costs are input costs that require a direct outlay of money by the firm.
• Implicit costs are input costs that do not require an outlay of money by the firm.
• An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in the business.
• In his second year, John produces and sells 15 motorbikes for $150,000, which cost $75,000 to make.
• Whenever marginal cost is less than average total cost, average total cost is falling.
• In his first year of business, John produces and sells 10 motorbikes for $100,000, which cost him $50,000 to make.
• Total cost is represented as TC = TFC + TVC = Fixed Cost + (Variable cost x Quantity).
• Production Function is the relationship between the quantity of inputs (workers) and quantity of output (cookies).
• John Monroe owns a privately owned business called Monroes Motorbikes.
• Constant returns to scale refers to the property whereby long-run average total cost stays the same as the quantity of output increases.
• Diminishing marginal product occurs as the number of workers increases, the marginal product declines.
• Average fixed cost is fixed cost divided by the quantity of output.
• Total cost curves can have different shapes such as Rising Marginal Cost where marginal cost rises as the quantity of output produced increases, U-Shaped Average Total Cost where average variable cost usually rises as output increases because of diminishing marginal product, and Efficient Scale which is the quantity of output that minimizes average total cost.
• Diseconomies of Scale refer to the property whereby long-run average total cost rises as the quantity of output increases.
• Total cost can be divided into two types: Fixed Costs which are costs that do not vary with the quantity of output produced and are incurred even if the firm produces nothing at all, and Variable Costs which change as the firm alters the quantity of output produced.
• Marginal Cost is the increase in total cost that arises from an extra unit of production.
• Average Total Cost is total cost divided by the quantity of output.
• Average Variable Cost is variable cost divided by the quantity of output.
• Whenever marginal cost is greater than average total cost, average total cost is rising.
• Economies of Scale refer to the property whereby long-run average total cost falls as the quantity of output increases.
• Marginal Product is the increase in the quantity of output obtained from one additional unit of that input.
• Economies of scale often arise because higher production levels allow specialization among workers, which permits each worker to become better at a specific task.