Question

_{Matching Exercise – Costs of Production}

_TERM

1. _{Implicit Cost}

2. _{Normal Profit}

3. _{Factor substitution}

4. _{Explicit Cost}

5. _{Alternative cost}

6. _{Decreasing Returns to Scale}

7. _{Envelope Curve}

8. _{MC=MR rule}

9. _{Marginal Cost}

10. _{Economic profit}

11. _{Profit maximization in the short run}

12. _{Total fixed costs}

13. _{Constant costs industry}

14. _{Stage II}

15. _{Production function}

16. _{Shutdown point}

17. _{Variable input}

18. _{Marginal Revenue}

19. _{Sunk Cost}

20. _{Variable Costs}

_DEFINITION

_{a. The area in which every firm will produce.}

_{b. Another name for the long run average total cost curve.}

_{c. The cost of self-owned, self-utilized resources}

_{d. The profits necessary to ensure that a firm stays in business. Considered by economists to be part of implicit costs.}

_{e. The change in total cost associated with a one unit change in output.}

_{f. Inputs that rise and fall with the quantity of output.}

_{g. The substituting of one input for another to produce a given level of output.}

_{h. The addition to total revenue from selling one more unit of the product}

_{i. The ordinary expenses of the firm that accountants include, such as payroll costs and payments for raw materials. Accounting Costs}

_{j. A cost that has been incurred and cannot be recovered}

_{k. Costs of the fixed inputs such as rent. Does not change with changes in output. Also called overhead costs.}

_{l. The costs resulting from variable inputs.}

_{m. The rule a firm should follow to find the profit maximizing quantity.}

_{n. The production relationship that would lead to increasing costs.}

_{o. The value of what particular resources could have produced had they been used in the best alternative way; opportunity cost.}

_{p. An industry with a horizontal long run supply curve; its expansion does not result in an increase or decrease in input prices.}

_{q. The difference between total cost and total revenue.}

_{r. The relationship between the inputs used in production and the level of output.}

_{s. Considered to be the goal of every firm.}

_{t. The minimum point on the AVC. The lowest price at which the firm will produce.}

Answer 1

Term	Definition
1. Implicit cost	The cost of self owned and self utilized resources (a businessman may use his own labour power, land other asset in production. The cost calculated on such item is known as implicit cost)
2. Normal profit	The profit necessary to ensure that a firm stays in business.
3. Factor substitution	Substituting one input for another to produce a given level of output. (A firm may substitute one factor for other if one factor is costly than other and if there is perfect substitutability between the two. For example if a commodity can be produced with labour and capital. While producing with labour if the price of labour increase the firm may substitute capital for labour.
4. Explicit cost	The ordinary expenses of the firm that accounts include such as payroll cost and payments of raw material. (The explicit cost is the accounting cost which involves cash payments. )
5. Alternative cost	The value of what particular resources could have produced had they been used in the best alternative way. Alternative cost is the next best alternative sacrifice for the production of one commodity. If with $100 one can produce either 100 pizza or 100 soda, when he product 100 pizza the amount of soda he sacrifice is the opportunity cost of pizza.
6. Decreasing returns to scale	The production relationship that would lead to increasing cost. (Decreasing returns means output increase less than proportionately to the increase in input. This would lead to increase in cost.
7. Envelope curve	Another name of longrun average total cost curve. (In shortrun the average total cost curve is perfectly U shaped. But in longrun it is an envelope)
8. MC=MR rule	The rule a firm should follow to find the profit maximizing quantity. (A firms profit is maximum when MC=MR)
9. Marginal cost	The change in total cost associated with a one unit change in output. ( MC is the addition to the total cost when output increase by one unit)
10. Economic profit.	Difference between total cost and revenue.(Total revenue-Implicit cost and Explicit cost)
11.Profit maximization in shortrun	The area in which every firm will produce.
12. Total fixed cost	Cost of fixed inputs such a rent. Does not change with changes in output. (Fixed cost is the cost on fixed factors. These cost does not change with variation in output)
13. Constant cost industry	An industry with horizontal longrun supply curve. Its expansion does not result in an increase of decrease in input prices. (A constant cost industry is one in which its input cost remain the same when output increase or decrease.
14. Stage II	A production relationship that would lead to increasing cost.
15. Production function	The relationship between the inputs used in production and the level of outputs. (The production function is the functional relationship between the input and output).
16. Shutdown point	The minimum point on the AVC. The lowest price at which the firm will produce. (If the price fall below the AVC the firm will shutdown.
17. Variable input	Inputs that rise and fall with the quantity of output. ( variable inputs are the inputs that vary with the volume of output, example –raw materials )
18. Marginal Revenue	The addition to total revenue from selling one more unit of the product. (it is an additional revenue from the sale of an additional unit)
19. Sunk cost	A cost has been incurred and cannot be recovered.
20. Variable cost	The cost resulting from variable inputs. (These are the cost on variable inputs like raw materials, wages to casual labour, transportation, fuel etc.)