The Price System ch 7-12

marginal cost(definition)

The increase in total cost associated with a one-unit increase in production.

marginal cost(formula)

change in total cost/change in output

Whenever MPP is increasing

the marginal cost of producing a good must be falling.

MPP and MC move in ______ directions

opposite

total cost

The market value of allresources used to produce a goodor service.

fixed costs

Costs of production that don't change when the rate of output is altered, such as the cost of basic plants and equipment.

variable costs

Costs of production that change when the rate of output is altered, such as labor and material costs.

How fast total costs rise depends on

variable costs only

average total cost(formula)

Totalcost divided by the quantityproduced in a given time period.

average fixed cost(formula)

Totalfixed cost divided by the quantityproduced in a given time period.

average variable cost(formula)

Total variable cost divided by thequantity produced in a given timeperiod.

any increase in output will lower

average fixed cost

Average variable cost rises because of

diminishing returns in the production process.

What makes the ATC curve have a U-shape?

The initial dominance of falling AFC, combined with the later resurgence ofrising AVC

Marginal cost refers to

the change in totalcosts associated with one more unit of output.

diminishing returns in produc-tion cause

marginal costs to increase as the rate of output is expanded

The output decision has to be based not only on the capac-ity to produce (the production function) but also on

the costs of production (the costfunctions)

the MC curve in-tersects the ATC curve at its

lowest point

Thus average total costs decline as long as the marginal cost curvelies

below the average cost curve

Average total costs increase whenever marginalcosts

exceed average costs.

explicit cost

A payment made forthe use of a resource.

The essential economic question is

is howmany resources are used in production

implicit cost

The value ofresources used, for which nodirect payment is made.

economic cost

The value of allresources used to produce a goodor service

economic cost(formula)

Explicit costs + Implicit costs

long run

A period of time longenough for all inputs to be varied(no fixed costs).

The short run ischaracterized by

fixed costs

there are nofixed costs in

the long run

Thelong-run cost curve is just a summary of our best short-run cost possibilities, using exist-ing

technology and facilities

economies of scale

Reductionsin minimum average costs thatcome about through increases inthe size (scale) of plant andequipment.

constant returns to scale

Increases in plant size do not affectminimum average cost: minimumper-unit costs are identical forsmall plants and large plants.

a worker's productivity (MPP) depends on

thequantity and quality of other resources in the production process.

unit labor cost(formula)

Hourly wage ratedivided by output per labor-hour.

The basic incentive for producing goods and services is

the expectation of profit.

the profit motivealso encourages

businesses to produce the goods and services consumers desire, atprices they're willing to pay.

economic cost

The value of allresources used to produce a goodor service

opportunity cost.

the next best thing given up

explicit cost

A payment made forthe use of a resource.

implicit cost

The value ofresources used, for which no directpayment is made.

Whenever economic costs exceed explicit costs, observed(accounting) profits will

exceed true (economic) profits.

economic profit

The differencebetween total revenues and totaleconomic costs.

normal profit

The opportunity cost of capital; zero economicprofit.

economic profits represent something over and above

normal profits

A productive activity reaps an economic profitonly if it earns more than its

opportunity cost

The inducement to take on the added responsibilities of owning and operating a busi-ness is the potential for

economic profit

monopoly

A firm that producesthe entire market supply of aparticular good or service.

market structure

The numberand relative size of firms in anindustry.

perfect competition

A market inwhich no buyer or seller has marketpower.

duopoly

An oligopoly with only two firms

Oligopoly

A market structure in which a few large firms dominate a market

A perfectly competitive industry has several distinguishing characteristics, including

• Many firms—lots of firms are competing for consumer purchases.• Identical products—the products of the different firms are identical, or nearly so.• Low entry barriers—it's relatively easy to get into the business.

market power

The ability toalter the market price of a goodor service.

competitive firm

A firm withoutmarket power, with no ability toalter the market price of the goodsit produces.

A perfectly com-petitive firm is one whose output is so small in relation to market volume that

its outputdecisions have no perceptible impact on price.

The market demand curve for a product is always

downward-sloping (law of demand).

The demand curve confronting a perfectly competitive firm is

horizontal

production decision

Theselection of the short-run rate ofoutput (with existing plants andequipment).

total revenue

The price of aproduct multiplied by the quantitysold in a given time period: p x q.

the total revenue curve of a perfectly competitive firmis an

upward-sloping straight line with a slope equal to pe

short run

The period in which thequantity (and quality) of someinputs can't be changed.

fixed costs

Costs of productionthat don't change when the rate ofoutput is altered, such as the costof basic plants and equipment.

variable costs

Costs ofproduction that change when therate of output is altered, such aslabor and material costs.

The primary objective of the producer is to

findthat one particular rate of output that maximizes total profits

marginal revenue(definition)

Thechange in total revenue that resultsfrom a one-unit increase in thequantity sold.

marginal revenue(formula)

change in total revenue/change in output

for perfectly competitive firms,price equals

marginal revenue

if price \> MC we should

increase output

if price < MC we should

decrease output

if price = MC we should

maintain output

product maximization rule

Produce at that rate of outputwhere marginal revenue equalsmarginal cost.

As long as price exceeds MC,

additional output increases total profit.

At the rate of output where price = MC, total profits of the firm are

maximized

output should not be increased if MC

exceeds price.

total revenue(formula)

total revenue - total costs

profit per unit(formula)

price - average total cost

total profits(formula)

Profit per unit x Quantity

the profit-maximizing producer never seeks to maximize per-unit profits. What counts is

total profits

\_______________________ must be paid even if all output ceases.

Fixed costs

A firm should shut down only if

the losses from con-tinuing production exceed fixed costs

where price doesn't cover average variable costs at any rate of output,

production should cease

shutdown point

That rateof output where price equalsminimum AVC.

The shutdown decision is a _____-run response

short

investment decision

Thedecision to build, buy, or leaseplants and equipment

long run

A period of time longenough for all inputs to be varied(no fixed costs).

Investment decisionsare ______-run decisions

long

a producer will want to build, buy, or lease a plant that's the

most efficient for the anticipated rate of output

the determinants of a firm's supply include

• The price of factor inputs.• Technology (the available production function).• Expectations (for costs, sales, technology).• Taxes and subsidies.

supply curve

A curve describingthe quantities of a good a produceris willing and able to sell (produce)at alternative prices in a given timeperiod, ceteris paribus.

the marginal cost curve is

the short-run supply curve for acompetitive firm.

If any deter-minant of supply changes,

the supply change shifts

property taxes are a

fixed cost

Property taxes

affect fixed costsbut not marginal costs.

payroll taxes

alter marginal costs.

Profits taxes

don't change costs.

equilibrium price

The price at which the quantity of a good demanded in a given time period equals the quantity supplied.

market supply

The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus.

marginal cost

The increase in total cost associated with a one-unit increase in production.

the market supply of a competitive industry is determined by

• The price of factor inputs.

• Technology.

• Expectations.

• Taxes and subsidies.

• The number of firms in the industry.

investment decisions

The decision to build, buy, or lease plants and equipment to enter or exit an industry.

competitive market

A market in which no buyer or seller has market power.