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| QUICK REVIEW 22-1 |
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- Explicit costs are money payments a firm makes to
outside suppliers of resources; implicit costs are the opportunity costs associated with a
firm's use of resources it owns.
- Normal profit is the implicit cost of
entrepreneurship. Economic profit is total revenue less all explicit and implicit costs
including normal profit.
- In the short run a firm's plant capacity is
fixed; in the long run a firm can vary its plant size and firms can enter or leave the
industry.
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| QUICK REVIEW 22-2 |
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- The law of diminishing returns indicates that
beyond some point
output will increase by diminishing amounts as more units of a variable
resource (labor) are added to a fixed resource (capital).
- In the short run the total cost of any level of
output is the sum of fixed and variable costs (TC 5 TFC 1 TVC).
- Average fixed
average variable
and average
total costs are fixed
variable
and total costs per unit of output; marginal cost is the
extra cost of producing 1 more unit of output.
- Average fixed cost declines continuouslyas output
increases;average-variable-costand average-total-costcurves are U-shaped
reflecting
increasing and then diminishing returns; the marginal-cost curve falls but then rises
intersecting both the average-variable and the average-total-cost curves at their minimum
points.
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| QUICK REVIEW 22-3 |
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- Most firms have U-shaped long-run
average-total-cost curves
reflecting economies and then diseconomies of scale.
- Economiesof scale are the consequenceof greater
specialization of labor and management
more efficientcapital equipment
and the spreading
of start-up costs among more units of output.
- Diseconomies of scale are caused by problems of
coordination and communication which arise in large firms.
- Minimum efficient scale is the lowest level of
output at which a firm's long-run average total cost is at a minimum.
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