Unit 03: production, cost, and the perfect competition model

production function?

the way a firm combines inputs to produce an output (ex: for a pencil this would be how the graphite, tree, metal, rubber, and machines are used to create the pencil itself

variable inputs

can be changed in the short run

fixed inputs

inputs that cannot be changed in the short run

short run

the period fo time during which there are fixed inputs; the time is too short for a firm to alter its capacity

long run

time long enough for a firm to change all inputs. Enought time to alter capacity

total product

total output produced by the firm by a certain amount of input

marginal product

output produced by one more unit of a variable, often labor (∆TP/∆L)

Average product

quantity of output produced by 1 unit of a variable input (often labor) (TP/L)

What happens to MP in the short run

it initially increases because of specialization/division of labor, but then it starts to decrease due to diminishing returns

When MP inc, what does that mean for TP?

if MP inc, then TP increases at a faster rate

When MP is positive but dec, what does that mean for TP?

If Mp is positive but dec, Total product increases, at a decreasing rate (becomes flatter)

When MP = 0 what is TP

when mp equals o, TP is at a max

When MP < 0, what happens to TP?

when MP < 0, TP decreases

What happens when MP crosses AP?

TP starts to decrease

what happens to AP, when MP > AP?

Ap increases

What happens to AP when MP < AP?

AP decreases

Fixed cost

a cost that must be paid even when output = 0

-this cost is the same at all output levels

variable costs?

the additional cost of producing one more unit of output (∆TC/∆Q)

What does MC depend on?

MP

What happens to marginal cost as labor increases?

initially, MC dec due to specialization, but then Inc due to diminishing returns

Average Fixed cost (AFC)?

average per unit fixed cost of production for a given quantity of output (how much of fixed-cost is paid per unit) (FC/Q)

Average Variable Cost?

Average per unit variable cost of production for a given quantity of output.

- VC/Q

Average Total Cost

the average per-unit total cost of production for a given quantity of output

ATC = TC/Q

ATC = AFC + AVC

Patterns in the Graph of Cost?

MC decreases initially and then inc

-AFC always dec

-AVC and ATC dec and the inc (ATC and AVC get closer together since fixed costs go towards 0)

-MC crosses through the minimum of ATC and AVC

IF MC is Below ATC, what happens to ATC?

ATC falls (will swap when they cross)

IF MC is below AVC, what happens to AVC

AVC falls (swaps when lines cross)

If Mc is above ATC, then ATC is?

rising

If MC is above AVC what happesn to AVC

it rises

efficient scale?

quantity of output that minimizes average total cost

Increasing returns to scale?

output increase faster than all inputs

Dec return to scale

output increases at a slower rate than change in inputs

constant return to scale

output increases at the same rate as all inputs

Economies of scale?

LRATC dec, and output Increase

diseconomies of scale?

LRATC increases as total output Increases

Constant return to scale?

LRATC constant

Accounting profit

TR - explicit costs

Economic profit

TR - Expl and Impli costs

Normal profit?

when firm has just enought revenue to pay for E and and I costs (0 economic profit)

When will a firm make profit?

when TR > TC

What is the Profit Max rule?

MR = MC

when will firms keep producing a good?

(if Revenue is more or equal to MC of producing that item)

when do firms earn a profit

TR > TC

when do firms earn normal profit?

TR = TC

when do firms earn a loss?

TR < TC

when should a firm produce more?

if MR > MC

when should a firm produce less?

MR < MC

market power?

a firm can influence the market price of the good it sells

Shut down rule?

if TR < VC, the firm should shut down, but they will still pay fixed costs

-if TR > VC, or TR = VC stay open

-if MR = MC >= ATC stay open

-if MR = MC is b/2 ATC an AVC

-if MR = Mc < ATC shut down

What defines perfect competition?

1) price taking firm

2) lots of competitors

3) standard products

4) free entry and exit in the long run

5) zero economic profit in the long rny

Profit

TR - TC

(P - ATC)*Q

What does MR equal in a perfectly competitive market

MR = P = AR = D

TR = ?

P times Q

Total cost = ?

ATC * Q