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Eco Exam #3

Docta Chawles

QuestionAnswer
firms purchase inputs to.. produce and sell outputs
All firms have an incentive to.. maximize profits and thus to minimize costs
production the process by which inputs are combined, transformed, and turned into outputs
a firm exists when.. a person or a group of people decides to produce a good or service to meet a perceived demand.
profit total revenue - total cost
total revenue the amount received from the sale of the product; it is equal to the number of units sold (q) times the price received per unit (P).
total cost (economic cost) the total out of (1) out-of-pocket costs, and (2) opportunity cost of all factors of production.
economic profit total revenue - total economic cost
the most important opportunity cost that s included in economic cost is the.. opportunity cost of capital
normal rate of return the rate that is just sufficient to keep owners and investors satisfied.
short run (two conditions hold) the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
long run period of time when there are no fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and existing firms can exit the industry
a firm needs to know what 3 things? 1. the market price of output 2. the techniques of production that are available 3. the prices of inputs
optimal method of production the production method that minimizes cost
production technology the quantitative relationship between inputs and outputs.
capital-intensive technology technology that relies heavily on capital instead of human labor
labor-intensive technology technology that relies heavily on human labor instead of capital
production function or total product function a numerical or mathematical expression of a relationship between inputs and outputs. it shows units of total product as a function of units of inputs.
marginal product the additional output that can be produced by adding one more unit of a specific input, ceteris paribus. (all else equal) :)
law of diminishing returns when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
average product of labor total product / total units of labor
average product the average amount produced by each unit of a variable factor of production
fixed cost any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
variable cost a cost that depends on the level of production chosen
total cost total fixed costs plus total variable costs
TC = TFC + TVC
total fixed cost is sometimes called overhead
total fixed cost/overhead the total of all costs that do not change with output even if output is zero
AFC = TFC / q
average fixed cost total fixed cost divided by the number of units of output; a per-unit measure of fixed costs.
spreading overhead the process of dividing total fixed costs by more units of output. Average fixed cost declines as quantity rises.
total variable cost the total of all costs that vary with output in the short run
total variable cost curve a graph that shows the relationship between total variable cost and the level of a firm's output
marginal cost the increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.
slope of TVC = (∆TVC ÷ ∆q) = (∆TVC ÷ 1) = ∆TVC = MC
ATC = TC÷q
average total cost total cost divided by the number of units of output
extra formula: ATC = AFC + AVC
accounting costs out of pocket costs or costs as an accountant would define them. Sometimes referred to as explicit costs
economic costs costs that include the full opportunity costs of all inputs. These include what are often called implicit costs
total fixed costs TFC costs that do not depend on the quantity of output produced.These must be paid even if output is zero
total variable costs TVC costs that cary with the level of output
total cost TC the total economic cost of all the inputs used by a firm in production TC = TFC+TVC
average fixed costs AFC fixed costs per unit of output AFC = TFC/q
average variable costs AVC variable costs per unit of output AVC = TVC/q
average total costs ATC total costs per unit of output ATC = TC/q ~or~ ATC = AFC+AVC
marginal costs MC the increase in total cost that results from producing 1 additional unit of output MC = TC/∆q
perfect competition exists in an industry that contains many relatively small firms producing small firms producing identical products
homogenous products undifferentiated products; products that are identical to, or indistinguishable from, one another.
total revenue TR the total amount that a firm takes in from the sale of its product: the price per unit times the quantity of output the firm decides to produce TR= P x q
marginal revenue MR the additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, P = MR P* = d = MR
breaking even the situation in which a firm is earning exactly a normal rate of return
ATC = TC/q
TC = ATC x q
shut down point the lowest point on the average variable cost curve. When price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs
short-run industry supply curve the sum of the marginal cost curves (about AVC) of all the firms in an industry
increasing returns to scale, or economies of scale an increase in a firm's scale of production leads to lower costs per unit produced
constant returns to scale an increase in a firm's scale of production has no effect on costs per unit produced
decreasing returns to scale, or diseconomies of scale an increase in a firm's scale of production leads to higher costs per unit produced
long run average cost curve LRAC the "envelope" of a series of short run cost curves
minimum efficient scale MES the smallest size at which the long run average cost curve is at its minimum
optimal scale of plant the scale of plant that minimizes average cost
P* = SRMC = SRAC = LRAC P* = SRMC = SRAC = LRAC
long run competitive equilibrium when P=SRMC=SRAC=LRAC and profits are zero
firms vary in size and internal organization, buy they all take inputs and transform them into outputs through a process called production
in perfect competition, no single firm has any control over prices. This follows from two assumptions: perfectly competitive industries are composed of many firms, each small relative to the size of the industry , and each firm in a perfectly competitive industry produces homogeneous products.
the demand curve facing a competitive firm is perfectly elastic. If a single firm raises its price above the market price, it will sell nothing. Because it can sell all it produces at the market price, a firm has no incentive to reduce price.
a normal rate of return on capital is included in total cost because tying up resources in a firm's capital stock has an opportunity cost. if you start a business or buy a share of stock in a corporation, you do so because you expect to make a normal rate of return. Investors will not invest their money in a business unless they expect to make a normal rate of return.
a positive profit level occurs when, a firm is earning an above-normal rate of return on capital
two assumptions define the short run: 1. a fixed scale or fixed factor or production and 2. no entry to or exit from the industry.
In the long run, firms can choose any scale of operations they want and new firms can enter and leave the industry
to make decisions, firms need to know three things: 1. the market price of their output 2. the production techniques that are available, and 3. the prices of inputs
the relationship between inputs and outputs (the production technology) expressed numerically or mathematically is called a production function or total product function
profit per unit = AR - ATC
ATC - P = loss per unit
Created by: ciarasafari