AP MICRO section 10

explicit cost

costs that involve an outlay of money

• made up of fixed and variable costs to business

Implicit costs

does not involve an outlay of money

• measured by the opportunity cost/normal rate of return

accounting profit

consists of total revenue minus explicit cost and depreciation

economic profit

consists of total revenue minus explicit cost and implicit cost

• determines whenever or not you stay in business and do something else—find better alternative use for resources

F

economic profit is typically is greater than accounting profit

economic profit

total revenue > explicit cost + implicit cost

economic loss

total revenue < explicit cost and implicit cost

Normal rate of return

when TR=EC+IC

ie: profit=0

normal profit

TR=TC

(TC=EC+IC)

profit maximizing rule

produce at the level of output where the marginal revenue of the last unit produced is equal to marginal cost (not necessarily the same value in graph/chart)

AKA: optimal output tule

• focus of all firms

• produce largest quantity at MR>MC (when MC switches to being less than MR)

marginal revenue

change in total revenue generated by an additional unit of output

• when _____ is consistent for every output level = perfectly competitively market

  • ___=P=D

marginal cost

change in total cost per additional unit of output

MR=MC

1. profit is maximized

2. minimized loss

marginal cost curve

shows how the cost of producing one more unit depending on the quantity that has already been produced

• represents the supply curve for the firm

marginal revenue curve

shows how total revenue varies as output varies

horizontal line

in a perfectly competive market, MR (D) is a _____, perfectly demand elastic

More

when MR>MC, this indicates that the firm should produce ___ goods

Less

when MR<MC produce ____ goods

P maximized/optimized OP

when MR=MC, it is ____

increasing; elastic

When MR +, total revenue ___ and demand is ____

decreasing; inelastic

when MR is - , total revenue is ___ and demand is ___

maximized; unitary

when MR=0 total revenue is ____ and demand is ____

socially efficient

when MC and MR intersect, the point is called the _____ point

minimum efficiency scale

quantity where average total cost is at its lowest point (most efficient)

U shaped

the ATC is _____, because it has both characteristics of AVC and AFC

Fixed cost

costs that do not depend on quantity of output, costs of FI

EX; interest on company issued bonds, real estate taxes, executive salaries, insurance premiums, rental payments

Variable cost

costs that depend on quantity of output level

Ex: advertising expenditures, fuel, shipping charges, payments for raw materials, wage payments, salex taxes

fixed cost

cost that does not change no matter how much quantity is produced

FC

TC at 0=

spreading effect

the larger the output, the greater the quantity of output over which the fixed cost is spread, leading to a lower average fixed cost

• powerful at low levels of output

diminishing returns effect

the larger the output, the greater the amount of the variable input is required to produced additional units, leading to a higher average variable cost

• powerful at high levels of output

production function

shows the relationship between inputs into the production process and the quantity of output produced

fixed inputs

inputs that cannot be varied

EX: buildings, factories, office space,

variable inputs

inputs can be varied overtime

EX: Labor, machinery

long run

time period in which all inputs can be vaied

short run

time period in which at least one input is fixed

total product curve

shows the product function graphically of how the quantity of output depends on the quantity of variable input for a given quantity of fixed input

greater; increases; added

as the TPC increases, the ____ the output ___as inputs are ___

decreases

as TPC gets flatter, MP ____

marginal product

additional quantity of output produced by using one more unit of that input

inverse

what relationship does MP and MC have?

diminishing returns to an input

increase in quantity of input, all other inputs are fixed leads to a decrease in marginal product of that input

• result of redundancy and congestion

increases

marginal product ___ when more FI to work with

rising

When MP>AP, AP is ___

Falling; diminishing returns

when MP< AP, AP is ___ demonstrating___

maximized

when MP=AP, AP is ___

maximized

when MP=0, TP is ___

sunk cost

refers to the cost that has already been incurred and cannot be recovered

• ignored when making a decision

EX: staff training and education, product research, advertising, speciality equipment

above

the SRSC in a firm cost curve is when MC lies ____ AVC

LRSC

where MC is below the ATC, it is the ____ for the firm

Exit point

where MC intersects the lowest point of the ATC in the long run

shut down point

in the short run when the MC interesects the AVC, indicates to no produce additional goods

Long run average total cost curve

shows the relationship between output and average total cost when fixed cost has been chosen to minimize the ATC for each level of output

how to minimize loss

1. increases price

2. lower ATC

economies of scale

when long run ATC decreases as output increases

constant returns to scale

when output increases directly in proportion to an increase in all inputs

diseconomies of scale

long run ATC increases as output increases

• indicate coordination and communication problems

increasing returns to scale

when output increases more than in proportion to an increase in all inputs

deceasing returns to scale

output increases less in proportion to an increase in all inputs

minimum efficiency scale

smallest quantity at which a firms long run ATC is minimized

T

A firm has market power when they have the ability to set prices (above marginal cost)

anti-trust laws

prevent monopolies

Long run average cost

planning curve for the firm

• made up of a series of SRAC curves

lower

in the short run when output is low, fixed costs are ____

behavior of firms

perfectly competitive, monopolistically competitive, oligopoly, and monopoly

price taking firm

a firm whose actions have no effect on the market price of the good or service it sells

perfectly competitive market

• many firms

• firms are price takers, no control over price= market sets price

  • MR=Pe=AR

• has a standardized product (commodity), homogenous, not differentiated

• interdependent

• no barriers of entry

• P=MC

• no LR profit, returns to normal rate of return

-MR/D is horizontal

monopoly

• one producer

• control price

• no close substitutes, no differentiated

• lots of barriers of entry

• can have LR profit

• P>MC

Oligopoly

• few firms

• can either have product differentiation or not

• imperfect competition

  • varied control, depends on interdependence

• interdependent

• some barriers of entry

• can profit in LR

• P>MC

-price leadership

-kinked DC

-game theory

Monopolistic competitive

• large number of competing firms

• firms are price makers

• differentiated

• independent

• few barrier to entry

• P>MC

• free entry and exit

-small market share

increases

MP>AP, AP ___

decreases

MP<AP, AP ___

maximized

MP=AP, AP is ___

maximized

MP=0, TP is ___

increasing

when MP is increasing, TP is ____

decreasing

when MP decreases, TP is ____

add variable inputs; Decrease, increase; increase

continuing to ____ to increase production, the firms will start to experience diminishing returns, and have less efficiency and MP will ___, MC ___, ATC ___

another SRAC

to create more efficiency, allow for more fixed inputs to now take on the additional variable inputs

above; below

when you are overproducing, you are ___ the MES, for underproducing, you are ___ the MES

• you can calculate to check too

negative

when the demand is ___ sloping, firms have the ability to set the price

P>MC

market power

NRR

when a firm is in the long run, P=ATC=Profit is 0=

barrier to entry

prevents other firms from entering the industry

• to earn economic profits, protects

• allows monopoly to persist

Natural monopoly

a monopoly created and sustained by economies of scale

• allowed by government as the single provided, highly regulated

• provides a large cost advantage (large fixed cost) to a single firm that produces all of an industr’s input

patents

gives an inventor the sole right to make, use or sell that invention for a period of time (16-20yrs)

ex: drugs and devices

copy right

gives holder sole right to profit from that work (lifetime)

government created barriers

patents and copyright—temporary monopolies

-incentives

price leadership

one firm is dominant, rest follow and compete through advertising

monopoly

• have higher demand

• less quanitity than Socially effenct point

• creates DWL

imperfect competition

when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices

No; yes and up

does increasing fixed costs change the marginal cost curve? how about the average total cost curve?

decreases

average fixed costs ____ as output increases

2 factors that shift cost curves

1. change in technology

2. change in the price of a factor of production