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total revenue
the amount a firm receives for the sale of its output
total cost
the market value of the inputs a firm uses in production
profit
TR-TC
explicit costs
input costs that require an outlay of money by the firm
implicit costs
input costs that do not require an outlay of money by the firm (opportunity costs)
objective of a firm
maximize profits
economic profit
TR-TC, including both explicit and implicit costs
accounting profit
TR- total explicit costs
Production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
marginal product
the increase in output that arises from an additional unit of input
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
fixed costs
costs that do not vary with the quantity of output produced
variable costs
costs that vary with the quantity of output produced
average total cost
TC/Q
average fixed cost
FC/Q
average variable cost
VC/Q
marginal cost
Change in total cost/change in quantity
efficient scale
the quantity of output that minimizes average total cost
typical firm's cost curve
Many firms experience increasing marginal product before diminishing marginal product.
short-run
some costs are fixed
long-run
fixed costs become variable costs
economies of scale
the property whereby long-run average total cost falls as the quantity of output increases
diseconomies of scale
the property whereby long-run average total cost rises as the quantity of output increases
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
competitive market
a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
average revenue
TR/Q therefore average revenue equals the price of the good
marginal revenue
change in TR/ Change in Q
3 general rules for profit maximization for competitive firm
when MR> MC, increase Q
when MC>MR, decrease Q
when MR=MC, profit is maximized
shutdown
refers to a short-run decision not to produce anything during a specific period of time because of current market conditions
exit
refers to a long-run decision to leave the market
sunk costs
costs that have already been committed and cannot be recovered. Firms considers its sunk costs when deciding to exit, but ignores them when deciding whether to shut down
firms short-run decision to shut down
shuts down if the revenue it gets from producing is less than the variable cost of production
shuts down if TR
firms long-run decision to exit a market
exits if the revenue it would get from producing is less than its total cost
Exit if TR
firms long-run decision to enter a market
enters the industry if such an action would be profitable
Enter if TR>TC
Enter if TR/Q> TC/Q
Enter if P>ATC
competitive firm's long-run supply curve
long-run supply curve is the portion of its marginal cost curve that lies above average total cost
short-run supply curve
portion of its marginal cost curve that lies above average variable cost
monopoly
a firm that is the sole seller of a product without close substitutes
why do some monopolies only have 1 seller
~monopoly resources: a key resource required for production is owned by a single firm
~government regulation: the gov't gives a single firms the exclusive right to produce some good or service
~the production process: a single firm can produce output at a lower cost than can a larger number of firms
natural monopoly
a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
difference between a competitive firm and a monopoly
a monopoly's ability to influence the price of its output. A competitive firm is small relative to the market in which it operates and, therefore, has no power to influence the price of its output
when a monopoly increases the amount it sells, there are 2 effects:
~the output effect: more output is sold, so Q is higher, which tends to increase total revenue
~the price effect: the price falls, so P is lower, which tends to decrease total revenue
Profit maximization in competitive firm
P= MR=MC
Profit maximization in monopoly firm
P> MR=MC
a monopoly's profit
profit= (P-ATC) x Q
