Econ 2

When a firm earns normal profit

accounting profit equals implicit costs.

A firm is said to experience economies of scale when:

average cost falls as a firm expands its plant size.

The long-run average cost curve of a firm is sometimes referred to as the firm's:

planning curve

firm's total revenue minus the opportunity cost of (implicit) all resources used in production is called its:

economic profit

firms total revenue minus explicit costs only

Accounting profit

consumer surplus

Consumer surplus is the difference between the most a consumer would pay for a given quantity of a good and what the consumer actually pays.

A firm experiences diseconomies of scale whe

its long-run average cost increases as output increases.

short run can be adjusted only through

variable resources

producer goal

maximize profit

to hire/buy resources firms must pay at least

the opportunity cost

cash amount paid

opportunity cost

all resources have

opportunity costs

explicit costs

actual cash payment for resources

implicit costs

opportunity costs

breakeven only okay in

economic profit

normal profit

economic profit is zero

long run

when all resources are variable

production function

relationship between the amount of resources employed at certain output

output

total product

marginal product

change in total product when 1 resource increases

average total cost equation

total cost/total output

average variable cost

vc/output

marginal cost trend

rises and the falls

marginal product

change in output/change in # of variable resources

when output equals zero

FC=TC

law of diminishing marginal returns

as more variable is added to a fixed resourcemarginal product declines and eventually becomes negative

ATC and AVC separated by

average fixed costs

average fixed costs

fixed costs/output

ATC and AVC cross MC at

min pts b/c when marginal is below average, pulls average up

long run average cost curve represents

lowest cost of producing at each level

economies of scale

things businesses can do to bring down costs as output increases

diseconomies of scale

inconvenience, costs rising as output rises

relationship between mc and mp

inverse

min efficient scale

lowest rate of output at which firms take full advantage of economies of scale

marginal product of labor

change in qty output produced w one more unit of labor

MR=

profit

can economies of scale and diseconomies of scale exist in one firm

yes

the long run is the

planning horizon not succession of short runs

most important feature of production in the SHORT RUN.

law of diminishing marginal returns

When marginal product is increasing,

total product increases at increasing rate

When marginal product is decreasing,

total product increases at decreasing rate rate

When marginal product is negative,

total product decreases

the slope of the total cost curves at each rate of output equals

the marginal cost at that rate of output

what do economists assume about tastes

tastes are given, unique, remain constant

utility

sense of pleasure from consumption

marginal utility

satisfaction or usefulness obtained from acquiring one more unit of a product

total utility

the total satisfaction one gets from consuming a product

law of diminishing marginal utility

as you consume more, smaller utility increase will be, ceteris paribus

is diminishing marginal utility applicable to everything

yes

if marginal utility does not go down immediately

it will go down eventually

can utility be compared between two consumers

no

the reasons individuals consume goods and resources is to

maximize ulility

when a good is free

increase consumption until it no longer adds utility

utility maximization constrained by

incime and price of goods consumed

utility received from different goods at different prices determines

how consumer spends income

utility maximizing conditions

entire budget spent, consumer equilibrium reached

Utility maximizing formula

MU of product A/Price of A = MU of product B/Price of B

Marginal Valuation

the dollar value of the marginal utility derived from consuming each additional unit of a good

when you buy a good the marginal valuation

at least equal price

marginal valuation seen in

demand curve

consumer surplus

The difference between the maximum amount a person is willing to pay for a good and its current market price.

market structure describes

market suppliers, The product's degree of uniformity

Ease of entry into the market

and Forms of competition between firms

four market structures

Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

perfect comp characterized by

Many buyers and sellers

Firms sell a homogeneous product

Firms and resources can easily enter or exit the market (no barriers to entry), Firms do not compete with each other

buyers and sellers have no control over the

price of a product

Homogeneous Product

a product that is completely standardized and not differentiated

No Barriers to Entry and Exit

-easily able to exit/enter -sbuyers/sellers know everything they need to know -resources move freely

No Competition Among Firms

The buyers and sellers know everything they need to know about the product to make informed purchase and selling decision, so no need to advertise.
This includes knowing the prevailing market price for the good.

perfectly competitive firms

price takers, cannot affect the price

market price determined

intersection of supply and demand

perfectly competitive firms demand curve

horizontal line (perfectly elastic)

The firm's only decision to impact profits is

How much of the good do I produce?

The firm must find the output at which

the difference between total revenues and total costs is the greatest (where TR-TC is the largest)

The firm will increase quantity supplied as long as

each additional unit of output adds to more to total revenue than to total costs

Golden Rule of Profit Maximization

A profit-maximizing firm produces the quantity of output where Marginal Revenue = Marginal Cost

Average revenue

TR/Q

Market price =

firm's demand curve =marginal revenue =average revenue

sometimes market _______ to allow a small firm from making economic profit

price is too low

short run

too short a period to allow the firm to go out of business

If revenue exceeds the variable cost of production

it will cover at least a portion of the fixed cost the firm incurs in short-run.

The firm may minimize losses by producing some amount of output

as long as the revenues generated from the output exceeds the variable cost of production.

golden rule of loss minimization

-Produce where MR=MC AND -Produce only when the P>AVC

If the average variable cost of production is greater than the price at all rates of output

the firm should stop producing in the short-run

Going out of business is a

long run decision

When average variable cost exceeds the market price at all output rates

•the firm should shut down in the short-run

shut down production

AVC>P

The marginal cost curve shows

quantity a firm is willing and able to supply at each price

A supply curve shows the

quantity a firm is willing and able to supply at each price.

A firm's marginal cost curve (above the Shutdown Point)

· is also the firm's supply curve (in the short-run)!

Short-Run Firm Supply Curve

In the short-run, a firm's supply curve is the upward-sloping portion of the marginal cost curve above the point where MC=AVC.

An industry supply curve

· is the horizontal summation of all of the firms individual supply (marginal cost) curves.

Market Equilibrium in perfect competition

the intersection between the market supply (sum of individual MC curves) and market demand.

market equilibrium price

fixed for firm

market equilibrium demand curve

horizontal at market determined price

Short-run economic profit will encourage existing firms to

expand scope of operations

Short-run economic profit to existing firms will

encourage new firms to enter the industry