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# Cost,Revenues,Profit

### IB HL ECONOMICS

What is the short run? The short run is that period of time in which at least one factor of production is fixed. All production takes place in the short run.
What is the long run? The long run is that period of time in which all factors of production are variable, but the state of technology is fixed. All planning takes place in the long run.
What is the Total Product(TP)? TP is the total output that a firm produces using its fixed and variable factors in a given time period.
How can output in the short run be increased? Output in the short run can only be increased by applying more units of variable factors to the fixed factors.
What is the Average Product(AP)? AP is the output that is produced, on average, by each unit of the variable factor.
What is the formula for finding AP? AP= TP/V TP=total output produced V=# of units of variable factor employed
What is the Marginal Product(MP)? MP is the extra output that is produced by using an extra unit of the variable factor.
What is the formula for finding MP? MP = ∆TP / ∆V ∆TP - change in total output ∆V - change in number of units of variable factor employed
What is the Law of Diminishing Returns? If one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input will yield progressively smaller,or diminishing,increases in output.
What is the HYPOTHESIS OF EVENTUALLY DIMINISHING MARGINAL RETURNS? As extra units of a variable factor are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish.
What is the Hypothesis of eventually diminishing average returns? As extra units of a variable factor are added to a given quantity of a fixed factor, the output per unit of the variable factor will eventually diminish.
Define Economic cost. The economic cost of producing a good is the opportunity cost of the firm's production. It is the opportunity cost of the FOP (resources) that have been used in the producing the service.
Define Opportunity Cost. Opportunity cost is the next best alternative foregone when an economic decision is made.
What are the factors used by a firm called in order to work out the economic cost of production? 1 - Factors that are purchased from others and not already owned by the firm 2 -Factors that are already owned by the firm
What are the costs related to the factors that are purchased from others and note already owned by the firm? Define and give an example. Explicit costs are any costs to a firm that involve direct payment of money. If a firm hires a worker for \$1000 a week, then the opportunity cost to the firm is the cost of that worker's wage and other things on which \$1000 could have been spent.
What are the costs related to the factors that are already owned by the firm? Define. Implicit costs are the earnings that a firm could have had if it employed its factors in another use/if it had hired out or sold them to another firm.
Explain implicit costs with an example. A firms owns buildings which help in producing goods which could be rented out for \$15000/month. The opportunity cost to the firm of using the buildings is the rent that is foregone and the things that could have been purchased with that money.
What are the components of short-run costs? 1) Total Costs 2) Average Costs 3) Marginal Cost
What make up the total costs? 1) Total Fixed Cost (TFC) 2) Total Variable Cost (TVC) 3) Total cost (TC)
Define Total Costs. Total Costs are the complete costs of producing output.
Define Total Fixed Cost (TFC). TFC is the total cost of the fixed assets that a firm uses in a given time period. Since # of fixed assets is fixed, TFC is a constant amount. TFC = # of fixed assets * cost of each fixed asset
Define Total Variable Cost (TVC). TVC is the total cost of the variable assets that a firm uses in a given time period. TVC = # of variable factors * cost of each variable factor TVC increases as the firm uses more of the variable factor
Define Total Cost (TC). TC is the total cost of all the fixed and variable factors used to produce a certain output. TC = TFC + TVC
What are the components of Average Costs? 1) Average Fixed Cost (AFC) 2) Average Variable Cost (AVC) 3) Average Total Cost (ATC)
Define Average Costs. These are the costs per unit of output.
Define Average Fixed Cost (AFC)? AFC is the fixed cost per unit of output. AFC = TFC / q (level of output) TFC is a constanct, AFC always falls as output increases
Define Average Variable Cost (AVC)? AVC is the variable cost per unit of output. AVC = TVC / q (level of output)
How does a change in output have an affect on AVC? Explain with the help of the Hypothesis of eventually diminishing average returns. AVC falls as output increases AVC rises as output increases As more of the variable factors are applied to the fixed factors, the output per unit of the variable factor eventually falls, and so the cost per unit of output eventually begins to rise.
Define Average Total Cost (ATC). ATC is the total cost per unit of output. ATC = TC / q (level of output) ATC tends to fall as output increases, starts to rise again as output continues to increase.
Define Marginal Cost (MC). MC is the increase in total cost of producing an extra unit of output. MC = ∆TC / ∆q MC tends to fall as output increases, and then to starts to rise again as the output continues to increase.
How does a change in output have an affect on MC? Explain with the help of the Hypothesis of eventually diminishing marginal returns. As more of the variable factors are applied to the fixed factors, the extra output from each additional unit of the variable factor added eventually falls, and so the extra cost per unit of output eventually begins to rise.
Define Economies of Scale. Economies of Scale are any decreases in long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output. ES lead to the firm experiencing increasing returns to scale.
Name the different types of economies of scale that may benefit a firm as it increases the scale of its output. 1) Specialization 2)Division of Labour 3)Bulk buying 4)Financial economies 5)Transport economies 6)Large machines 7)Promotional economies
Define Diseconomies of scale. Diseconomies of scale are any increase in long-run average costs that come about when a firm alters all of its factors of production in order to increase its scale of output. DES lead to the firm experiencing decreasing returns to scale.
Name the different types of diseconomies of scale that may afflict a firm as it increases the scale of its output. 1)Control and communication problems 2)Alienation and loss of identity
Define external economies of scale. External economies of scale come about when the size of the whole industry increases and this has an effect on the unit costs of the individual firms.
Give an example of external economies of scale. The growth of an industry leads to local universities starting up courses that relate to the skills required in the industry. The graduates would be ready trained for the firms, at no direct cost to the firms,making firms efficient & reducing unit costs.
Give an example of external diseconomies of scale. The rapid growth of an industry leads to more competition among individual firms to acquire raw materials, capital, and qualified labour. Such competition may force up the prices of the factors so forcing up the unit costs of the firms in the industry.
Explain factors that are already owned by the firm and implicit costs. A firm having factors it owns will not have to pay out money when it uses them. However there will be an opportunity cost involved in their use which needs to be accounted for.
Define Revenue. Revenue is the income that a firm receives from selling its products, goods, and services, over a certain time period.`
What are the different ways in which revenue can be measured? 1)Total Revenue (TR) 2)Average Revenue (AR) 3)Marginal Revenue (MR)
Define Total Revenue (TR). TR is the total amount of money that a firm receives from selling a certain amount of a good or service in a given time period. TR = p(price) * q(quantity)
Define Average Revenue (AR). AR is the revenue that a firm receives per unit of sales. AR = TR/q = (p*q)/q = P
Define Marginal Revenue (MR). MR is the extra revenue that a firm gains when it sells one more unit of a product in a given time period. MR = ∆TR/∆q
What happens to a firm's revenue as output increases (price doesn't change)? Result: Firm faces a perfectly elastic demand curve. P, AR, MR, and D are the same TR increases at a constant rate as output increases.
What happens to a firm's revenue as output increases (price falls)? Result: It will dace a downward-sloping demand curve AR = P, it falls as output increases MR also falls as output increases, but at a greater rate than AR TR rises at first, but eventually starts to fall as output increases
What are the basic rules involving Revenue? 1)When PED=elastic, firm wishing to increase revenue should lower its price 2)When PED=inelastic, firm wishing to increase revenue should raise its price 3)When PED= unity, firm wishing to increase revenue should leave price unchanged,revenue is maximiz
Define Profit Theory. Total Profit= Total Revenue - economic cost (explicit and implicit costs)
What is normal profit or zero economic profit? (normal profit) zero economic profit: Total Revenue = Total Cost (economic cost)
What is abnormal profit or economic profit? (abnormal profit) economic profit: Total Revenue > Total Cost (economic cost)
What is a loss or negative economic profit? (loss) negative economic profit: Total Revenue < Total Cost (economic cost)
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