Economic Costs and Profitability in the Long and Short Run Quiz

Economic costs encompass the foregone opportunities, reflecting the value of resources used for a particular activity.

Implicit costs involve non-monetary sacrifices, such as the foregone opportunities associated with using owned resources like equipment.

Explicit costs involve direct monetary expenses, while implicit costs represent the opportunity costs associated with non-monetary sacrifices.

Variable costs, dependent on production levels, include expenses like raw materials that vary with output changes in the short run.

In the short run, a firm may opt to shut down temporarily to minimize losses and avoid covering fixed costs when revenues cannot cover variable costs.

In the long run, firms can adjust various factors, including input levels, technology, and scale, to optimize profits.

When marginal cost exceeds average total cost, it contributes to an upward pull on the average, leading to its increase.

Economic profit considers both explicit and implicit costs, calculated as the difference between total revenue and the total cost, including opportunity costs.

Fixed costs, being independent of production levels in the short run, do not change as output increases.

Diminishing marginal returns indicate a decline in productivity as additional units of a variable input are utilized in the short run.

The long run allows firms to freely enter or exit an industry, adjusting to changing market conditions.

Short-run profit maximization is a key goal for firms, focusing on immediate gains within existing constraints.

At the minimum point of the AVC curve, marginal cost equals average variable cost, influencing production decisions.

Positive economic profit in the long run attracts new firms, leading to market entry.

As diminishing returns set in, each additional unit of input contributes less to output, causing the short-run production curve to steepen.