Unit 3 - Production, Cost, and the Perfect Competition Model Guide

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Constant returns to scale

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30 Terms

1

Constant returns to scale

output increase directly in proportion to an increase in all inputs (ex.

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2

Fixed cost

cost that doesn’t change with amount of output produced

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3

Long run

time period in which all inputs can be variable.

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4

Rental rate

price of capital.

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5

Production function

relation between the quantity of inputs a firm uses and the quantity of output it produces.

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6

Capital

goods that are used to produce goods /services.

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7

Marginal product

change in overall output when input changes.

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8

Diminishing marginal returns

as input increases, the output of each input will be less than the previous input.

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9

Profit

is the excess revenue that a business gets to keep.

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10

Production function

relation between the quantity of inputs a firm uses and the quantity of output it produces

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11

Fixed input

an input whose quantity doesnt change

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12

Variable input

an input whose quantity can change

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13

Long run

time period in which all inputs can be variable

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14

Short run

time period in which at least 1 input is fixed

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15

Marginal product

change in overall output when input changes

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16

Diminishing marginal returns

as input increases, the output of each input will be less than the previous input

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17

Output

quantity produced

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18

Rental rate

price of capital

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19

Capital

goods that are used to produce goods/services

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20

Fixed cost

cost that doesnt change with amount of output produced (ex

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21

Variable cost

cost that changes with amount of output produced

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22

Marginal cost

cost difference of one additional unit of output (∆TC/∆Q)

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23

Long run average total cost (LRATC)

same as short run ATC, but bigger

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24

Economies of scale

LRATC declines as output increases

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25

Diseconomies of scale

LRATC increaess as output increases

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26

Constant returns to scale

output increase directly in proportion to an increase in all inputs (ex

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27

Implicit cost

not an actual cost, a cost that you couldve been earning (ex

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28

Marginal Revenue

additional revenue gained by producing one more unit

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29

Exit rule

if P < ATC, exit the market

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30

Shut down rule

a firm should not produce unless it can cover its variable costs

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