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Cards In This Set
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Opportunity costs reflects both...
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Exlicit and implicit cost
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Explicit costs-
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Arise from transactions in which the firm purchases inputs or the services of inputs from other parties
ex. payroll, raw materials, insurance, electricity Usually recorded as costs in conventional accounting statements |
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Implicit costs-
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Associated with use of the land for farming even if no explicit payment is being made
ex. land can be sold or lease- the revenue the farmer would realize through sale or lease sacrificed by farming the land |
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Firms production cost will equal the ...
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Opportunity cost of the firm's resources which emphasizes that those resources can be used to produce many thigns; steel to make cars, fridges, homes etc
when a resource is used to produce one good it cant be used to produce something else |
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If a firm's wage is less than a worker's opportunity cost (what the worker coudl earn in the best alternative job)..
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The worker will quit and take the better paying alternative
*Wage is the opportunity cost of worker's services |
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Short-run cost of production-
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Firm's production cost varies with its rate of output
Short-run: period of time over which the firm is unable to vary all its inputs *some inputs are effectively fixed while others are variable |
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Total Fixed Cost-
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Cost incurred by the firm that does not depend on how much output it produces
Ex. expenditures on inputs the firm doesnt vary in the short run; plant and equipment- if the firm produces nothing it still incurs Total Fixed Cost |
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Total Variable Cost
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Cost incurred by the firm that depends on how much output it produces
*more output requires the use of more variable input TVC rises with output; to produce more in the short run firm must employ more workers, use more electricity, purchase more raw materials |
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Total Cost-
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Sum of total fixed cost and total variable cost at each output level
*identifies cost of all inputs, fixed and variable to produce a certain output; Total cost rises with output |
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Marginal Cost-
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Change in total cost that results from one unit change in output; also the change in total variable costs resulting from unit change in output
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MC-
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Shows how much additional cost a firm will incur if it increases output by one unit or how much saving it will realize if it reduces output by one unit
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Average Fixed Cost-
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Total fixed cost divded by the amout of output; fixed cost is constant- the greater the output the lower the average fixed cost
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Average Variable cost-
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Total variable cost divided by the amount of output
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Average Total Cost-
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Total cost divided by the output
= sum of Average Fixed Cost + Average Variable Cost |
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A firm's costs are determined by its production function which...
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Identifies the input combinations that can produce a given output and the prices that must be paid for these inputs
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