Microeconomics 7
The Cost of Production
The Cost of Production
Kartei Details
| Karten | 31 |
|---|---|
| Sprache | English |
| Kategorie | VWL |
| Stufe | Universität |
| Erstellt / Aktualisiert | 17.11.2012 / 13.03.2015 |
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accounting cost
Actual expenses plus depreciation charges for capital equipment.
economic cost
Cost to a firm of utilizing economic resources in production, including opportunity cost.
opportunity cost
Cost associated with opportunities that are forgone when a firm’s resources are not put to their best alternative use.
sunk cost
Expenditure that has been made and cannot be recovered.
total cost (TC or C)
Total economic cost of production, consisting of fixed and variable costs.
fixed cost (FC)
Cost that does not vary with the level of output and that can be eliminated only by shutting down.
variable cost (VC)
Cost that varies
as output varies.
amortization
Policy of treating a one-time expenditure as an annual cost spread out over some number of years.
marginal cost (MC)
Increase in cost resulting from the production of one extra unit of output.
average total cost (ATC)
Firm’s total cost divided by its
level of output.
average fixed cost (AFC)
Fixed cost divided by the level of
output.
average variable cost (AVC)
Variable cost divided by the level of
output.
user cost of capital
Annual cost of owning and using a capital asset, equal
to economic depreciation plus forgone interest.
rental rate (of capital)
Cost per year of renting one unit of capital.
isocost line
Graph showing all possible combinations of labor and capital that can be
purchased for a given total cost.
expansion path
Curve passing through points of tangency between a firm’s isocost lines
and its isoquants.
long-run average cost curve (LAC)
Curve relating average cost of production to output
when all inputs, including capital, are variable.
short-run average cost curve (SAC)
Curve relating average cost of production to output when
level of capital is fixed.
long-run marginal cost curve (LMC)
Curve showing the change in long-run total cost as
output is increased incrementally by 1 unit.
declination of average cost of producing as output increases (3reasons)
1. If the firm operates on a larger scale, workers can specialize
in the activities at which they are most productive.
2. Scale can provide flexibility. By varying the combination of inputs utilized to produce the firm’s output, managers can organize the production process more effectively.
3. The firm may be able to acquire some production inputs at lower cost because it is buying them in large quantities and can therefore negotiate better prices. The mix of inputs might change with the scale of the firm’s operation if managers take advantage of lower-cost inputs.
Increase of average cost of production as output increases (3reasons)
1. At least in the short run, factory space and machinery may make it more difficult for workers to do their jobs effectively.
2. Managing a larger firm may become more complex and inefficient as the number of tasks increases.
3. The advantages of buying in bulk may have disappeared once certain quantities are reached. At some point, available supplies of key inputs may be limited, pushing their costs up.
economies of scale
Situation in which output can be doubled for less than a doubling of cost.
diseconomies of scale
Situation in which a doubling of output requires more than a doubling of cost.
Increasing Returns to Scale:
Output more than doubles when the quantities of all inputs are doubled.
product transformation curve
Curve showing the various combinations of two different outputs (products)
that can be produced with a given set of inputs.
economies of scope
Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product.
diseconomies of scope
Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product.
degree of economies of scope (SC)
Percentage of cost savings resulting when two or more products are
produced jointly rather than Individually.
learning curve
Graph relating amount of inputs needed by a firm to produce each unit of output to its cumulative output.
Economies of Scale versus Learning
A firm’s average cost of production can decline over time because of growth of sales when increasing returns are present (a move from A to B on curve AC1), or it can decline because there is a learning curve (a move from A on curve AC1 to C on curve AC2).
cost function
Function relating cost of production to level of output and other variables that the firm can control.
