Term
|
Definition
examines the effects of introducing a change to an existing condition
-ex: what is the effect on a firm's revenues of producing an additional unit of output? (will you have to hire more workers, will increasing output cause you to lose revenue, etc.) |
|
|
Term
|
Definition
a person/firm should engage in an activity if the marginal benefit of that activity exceeds its marginal costs |
|
|
Term
How would a firm APPLY the marginal decision rule |
|
Definition
a firm *should* produce an additional unit of ouput only if the revenue generated from the sale of that unit (marginal revenue) is greater than the cost of producing the unit (marginal cost) |
|
|
Term
The Law of Decreasing/Diminishing Returns |
|
Definition
In the short run, as a firm uses more of a variable factor of production (labor), with a given quantity of fixed factors of production, the marginal product of the variable factor eventually decreases
[image] |
|
|
Term
Example of the law of diminishing returns |
|
Definition
employing additional units of labor to plant tomatoes
or
employing additional units of labor to bus tables
|
|
|
Term
| What is diminishing marginal product? |
|
Definition
Fall in the rate-of-increase in output of a process as the amount of an input is increased, while the amount of other inputs is held constant. For example, it is usually possible to increase the output of a farm by adding more labor, fertilizers, or water-but only up to a certain extent. If it were otherwise, any one farm could feed the entire world.
[image]
|
|
|
Term
| Firms have two kinds of costs. What are they? |
|
Definition
Fixed costs- The same regardless of quantity produced.
Variable costs- Change based on quantity produced. |
|
|
Term
|
Definition
Fixed costs arise because some inputs are fixed in the short run. For example, plant size and capital are typically fixed in the short run, and payments for their use . monthly rent, property taxes, loan payments for capital, etc., . are costs a firm incurs regardless of the level of production: 1,000 units a day, 100 units a day, or 0 units a day.
Fixed costs are the sum of all short run costs that are unrelated to the level of output.
Managers often refer to fixed costs as
overhead, indicating that these costs are unaffected
by output.
|
|
|
Term
Why is the fixed costs line on this graph flat?
Also, what does the distance between the TC and the TFC curves represent? |
|
Definition
|
|
Term
| Here is another way of visualizing total costs, variable costs, and fixed costs. Can you explan this visual? |
|
Definition
|
|
Term
| What are some examples of fixed costs and variable costs? |
|
Definition
Fixed Costs
Cost of plant and buildings.
Research and development costs.
Land purchase or land rental.
Costs associated with plant depreciation.
Labor costs.
Variable Costs
Cost of raw materials.
Cost of energy associated with production.
Cost of waste treatment.
Distribution costs. |
|
|
Term
| What does a total cost curve show? |
|
Definition
Total Cost= the market value of the inputs a firm uses in production.
-The total cost curve is upward sloping (i.e. increasing in quantity). This simply reflects the fact that it costs more in total to produce more output. |
|
|
Term
| What does a total cost curve look like? |
|
Definition
|
|
Term
| What is a production function? |
|
Definition
A production function shows the relationship between the number of workers hired and the quantity of output produced.
[image] |
|
|
Term
What does a production function look like on a graph?Explain why this graph includes the following:
-increasing at an increasing rate
-increasing at a decrasing rate
-decreasing |
|
Definition
|
|
Term
Production costs are broken down into two broad categories: fixed costs and _____________ costs. |
|
Definition
|
|
Term
Production costs are broken down into two broad categories: ___________ costs and variable costs. |
|
Definition
|
|
Term
| What is the difference between the short run and the long run? |
|
Definition
The long run and the short run do not refer to a specific period of time such as 3 months or 5 years. The difference between the short run and the long run is the flexibility decision makers have. The 2nd edition of Parkin and Bade's "Economics" gives an excellent distinction between the two:
"The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied." |
|
|
Term
Decision-making should not be influenced by fixed costs, such costs are said to be _____________ . What does this mean?
|
|
Definition
Decision-making should not be influenced by fixed costs, such costs are said to be SUNK COSTS.
Sunk costs are irretrievable no matter what happens. Similarly, rational business decisions will not determined by unrecoverable fixed costs.
Fixed costs are meaningful only to the extent that, like history or archeology, we can learn from them. Since they are fixed, there is a sense in which no alternative exists, so the opportunity costs of fixed resources are zero in the short run. Therefore, only opportunity costs should affect production decisions, costs that vary with output because alternatives are foregone while incurring these costs.
|
|
|
Term
| Costs that depend on the level of production are called _______________________. |
|
Definition
Variable Costs
Variable costs are incurred when labor, raw materials, or other variable inputs are used.
Variable costs depend on the level of production and are incurred when output is produced.
|
|
|
Term
|
Definition
The increase or decrease in the total cost of a production run for making one additional unit of an item.
Read more: http://www.businessdictionary.com/definition/marginal-cost.html#ixzz2Rz3GiCf9 |
|
|
Term
| Draw a marginal cost curve |
|
Definition
|
|
Term
| Why is the marginal cost curve initially downward sloping? |
|
Definition
| "As a firm grows from its initial point of producing one good, it may be able allocate labor more efficiently, buy in bulk, etc, causing the initial downward sloping of the curve. As the firm grows, there may be expenses that didn't exist at a smaller level." |
|
|
Term
| What letter does a marginal cost curve look like? |
|
Definition
|
|
Term
| Watch this video "A": http://www.youtube.com/watch?v=adldDfQOSg8&feature=youtube_gdata_player |
|
Definition
| You are now ready to answer some questions about this video. |
|
|
Term
Video "A": The speaker says there are 4 tasks involved in planting tomatoes. He then makes the point that if one worker had to do all of these tasks all day, what would the outcome be?
|
|
Definition
What if you have two workers, or three, or four? What's his main point here?
|
|
|
Term
| Video "A": If marginal productivity, is greater than marginal cost, what happens to the marginal cost curve? |
|
Definition
It slopes down.
The opposite is true as well. When marginal cost is greater than marginal productivity, the marginal cost curve slopes up.
|
|
|
Term
| Video "A": As you add more and more labor to a fixed quantity of land (or a fixed quantity of capital), what happens to the level of output? |
|
Definition
At some point, the level of output starts to become less and less in relation to the additional inputs.
[image] |
|
|
Term
Go back to Video "A": http://www.youtube.com/watch?v=adldDfQOSg8&feature=youtube_gdata_player
@ about 4.12 draw the the marginal cost curve, including each of the items he adds to his graph. Make sure you understand what he is adding and why. |
|
Definition
|
|
Term
| One explanation for the downward sloping part of the marginal cost curve is that it occurs due to the gains associated with ________________. Can you explain this? |
|
Definition
One explanation for the downward sloping part of the marginal cost curve is that it occurs due to the gains associated with SPECIALIZATION.
Explanation: When you go from one worker to two to three, workers are able to specialize, to work more efficiently. This occurs up to a point and then starts to diminish.
|
|
|
Term
Video "A": P=MC
P= MR
MC= MR
What does this mean? Draw a graph showing this idea. Can you explain it? |
|
Definition
A firm should produce at a point where price = marginal cost. This is the point of profit maximization.
Marginal cost and marginal revenue are economic measurements used to determine the effects of producing one more unit in a production system. Companies typically look to reach a production equilibrium where these measurements are equal. At this point, the company will maximize its profit. The relationship between these two economic concepts is important, as an imbalance on either side can result in production inefficiencies. When an imbalance occurs, companies will experience an economy of scale.
[image] |
|
|
Term
| There is a relationship between marginal cost and average total cost and average variable cost. These relatioships can be seen by examining the cost curves. Let's start with the relationship between MC and ATC. |
|
Definition
[image]
-When marginal costs are below average total costs, the ATC curve slopes downward.
-Once the marginal cost curve crosses the ATC curve, it pulls ATC up.
|
|
|
Term
| There is also a relatioship between marginal costs and average variable costs. A graph shows this relationship. |
|
Definition
[image]
Notice that when MC crosses AVC, it starts to pull this line up. The same is true when MC crosses ATC. Make sure you can explain why this is so. |
|
|
Term
|
Definition
some inputs are fixed (capitial)
-costs associated with the fixed input are fixed
-some inputs are variable (labor)
-costs associated with variable input are variable
-the firm can change output only within the constraints of the existing plant size
|
|
|
Term
|
Definition
-all inputs are variable
-all costs are variable
-the firm has sufficient time to adjust the size of existing plants, close down plants, or move into new markets |
|
|
Term
As labor increases, what happens to marginal product? |
|
Definition
MP increases, reaches a maximum, then decreases (as implied by the law of diminishing returns)
[image]
|
|
|
Term
|
Definition
-TC assigns costs to the fixed and variable resources
TC= TFC+TVC
ex: FC=500 VC=150 per unit
TC= 500+150= 650 |
|
|
Term
|
Definition
the cost of the firm's fixed factors of production--cost of land, capitial, entrepreneurship, etc.
-fixed costs remain constant as the firm's output level increase
ex: depreciation, property taxes, etc. |
|
|
Term
| Total Variable Cost (TVC) |
|
Definition
the cost of the firm's variable cost of production (ex: labor)
-VC increases as the firm employs more labor to increase output |
|
|
Term
|
Definition
The cost of all the factors of production used by a firm
-TC increases as the firm's output increases
TC=TFC+TVC |
|
|
Term
| These three cost curves are often called "U" shaped. What are they, and why are they "U" shaped? |
|
Definition
Average Total Cost
Average Variable Cost
Marginal Cost
The U-shapes of the average total cost, average variable cost, and marginal cost curves are directly or indirectly the result of increasing marginal returns (opposite of decreasing marginal returns) for small quantities of output followed by decreasing marginal returns for larger quantities of output. The decreasing marginal returns in Stage II result from the law of diminishing marginal returns.
[image]
|
|
|
Term
| Make sure that you can create a Total Utility table that reflects the "law" of diminishing marginal utility. |
|
Definition
What should the table include? 6 data points.
Product Name
Quantity Total Utility Marginal Utility
(diminishing marginal utility) |
|
|
Term
Make sure that you know how to solve problems that contain a budget constraint and 2 products with different MU/per $.
Questions are here: http://www.reffonomics.com/TRB/chapter6/utility.htm |
|
Definition
| http://www.reffonomics.com/TRB/chapter6/utility.htm |
|
|
Term
| Make sure you can explain how a downward sloping demand curve and marginal utility are connected. |
|
Definition
| A demand curve can also be thought of as a marginal utility curve. Since, for most consumers, most consumption reflects the law of diminishing marginal utility, demand is downward sloping. |
|
|
