CHAPTER 9 READING OUTLINE

1. Distinguish between explicit and implicit costs.
Explicit costs are payments the firm must make for inputs to non-owners of the firm to attract them away from other employment, for example, wages and salaries to its employees. Implicit costs are non-expenditure costs that occur through the use of self-owned, self-employed resources, for example, the salary the owner of a firm forgoes by operating his or her own firm and not working for someone else.

2. Explain an accounting profit and an economic profit.
Accounting profit equals sales revenue minus explicit costs, such as material, the wages of employees, etc… and Economic profit equals the accounting profit minus the additional implicit costs of the business. This includes entrepreneurial ability, forgone interest, forgone labor income, etc…

3. Explain how the short run differs from the long run.
In the short run, the industry is composed of a specific number of firms, each with a plant size that is fixed and unalterable in the short run. Firms may shut down in the sense that they can produce zero units of output in the short run, but they do not have sufficient time to liquidate their assets and go out of business.
But, in the long run the firms already in an industry have sufficient time to either expand or contract their capacities. More importantly, the number of firms in the industry may either increase or decrease as new firms enter or existing firms leave.

4. Explain the law of diminishing marginal returns. Give a personal example.
The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease. Too many helpers in the kitchen. At a certain point it hinders production.

5. Define and give the equation to compute marginal product and average product and complete the table below 6.1. Marginal Product = change in total product change in labor input 6.2. Average Product = total product Units of labor

Labor | Output or Total Product | Marginal Product | Average Product | 0 | 0 | ******* | ****** | 1 | 12 | 12 | 12 | 2 | 25 | 13 | 12.5 | 3 | 35 | 10 | 11.67 |

6. Explain the difference between fixed and variable costs.
Fixed Cost: Any cost that in total does not change when the firm changes its output. Variable Cost: A cost that increases when the firm increases its output and decreases when the firm reduces its output.

7. If marginal product is increasing at an increasing rate, what is happening to marginal cost? Why?
Marginal product is the increase in output from having an additional worker. So, if the marginal product is decreasing, that would mean that the firm is adding new workers. Therefore, the marginal cost would also be increasing.

8. If the marginal product is decreasing but positive, what is happening to the marginal cost? Why?
Marginal product is the increase in output from having an additional worker. So, if the marginal product is decreasing, that would mean that the firm is adding new workers. Therefore, the marginal cost would also be increasing.

9. Give the equations for the following terms and complete the table. 10.3. Total Cost = TFC (total fixed costs) + TVC (total variable cost) 10.4. Total Variable Cost = AVC (average variable cost) x Q (output) 10.5. Average Total Cost = TC (total cost) /Q (output) 10.6. Average Fixed Cost = TFC (total fixed costs)/Q (output) 10.7. Average Variable Cost = TVC(total variable cost)/Q (output) 10.8. Marginal Cost = change in TC (total cost)/change in Q (output)
Total fixed costs are $50 and each laborer or worker, the variable input, is paid $10. Laborer(Worker) | Output or Total Product | Total Cost | Total Variable Cost | Total Fixed Cost | Average Total Cost | Average Fixed Cost | Average Variable Cost | Marginal Cost | 0 | 0 | $50 | 0 | $50 | ****** | ****** | ****** | ****** | 1 | 12 | 60 | $10 | 50 | $5 | 4.17 | .83 | $.833 | 2 | 25 | 70 | 20 | 50 | 2.80 | $2 | $.80 | .77 | 3 | 35 | $80 | 30 | $50 | 2.29 | 1.43 | .86 | $1 |

10. Explain what the long run average cost curve shows.
The long run average cost curve shows the relationship between the lowest attainable average total cost and output when both the plant and labor are varied. It is a planning curve that tells the firm which plant that minimizes the cost of producing a given output range.

11. Explain the regions of economies, constant returns, and diseconomies of scale on the long run average cost curve and discuss the factors that contribute to each.
Economies of scale, diseconomies of scale, and constant returns to scale are all related terms that describe what happens as the scale of production increases. It is important to understand the concepts of these returns to scale because they can be an important factor in determining the optimal and equilibrium size of firms.
Economies of scale: the situation when a firm’s average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and hence, its output). Constant returns to scale: the situation when a firm’s average total cost of producing a product remains unchanged in the long run as the firm varies the size of its plant (and hence its output).

12. Define minimum efficient scale.
Minimum efficient scale: the lowest level of output at which a firm can minimize long-run average total cost.

13. Give one example of how the principles in this chapter currently impact your life or relate to your chosen career.
I really don’t understand this chapter well enough to see how it relates to me other than the diminishing returns section. That is just like when there are too many people in the kitchen “helping”.