E&S Week 11: Sellers and incentives

What is variable FOP?

Can be changed in the short-run, eg. labour and energy and raw materials (changes if output changes)

What is fixed FOP?

Cannot be changed in the short-run (stays the same, regardless of output), eg. land

We only assime we have 2 FOPs: _ and _

land, capital

Total product

The total output produced by a certain amount of labour

Marginal product

The change in total product that results from a one-unit increase in labour

Average product

Total product divided by the quantity of labour (TP/L)

What is a product curve?

Shows how the firm’s total product, marginal product and average product change as the firm varies the qty of labour

Almost all production processes have _ increasing marginal product and then eventually, it will _

increasing, diminish

Increasing marginal product is due to

Specialisation

Why does diminishing marginal product occur?

Each additional worker has less access to capital and less space to work in

Law of diminishing returns

As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes

When MP > AP, AP is _

increasing

When MP < AP, AP is _

decreasing

When MP = AP, AP is at _

maximum

Sunk cost

Cost that has already been paid, or must be paid, regardless of any future action. Irrelevant when making decisions. For firms, if revenue > other costs, then just move forward with the business.

In the SR, total cost = ?

cost of all the FOPs (all inputs)

TC = wL + rK0 (w = wage rate per labour, r = rental rate per capital, L = labour, K0= capital/machines)

Simplifying assumption: all fixed costs are _

sunk

TC = TVC + TFC

Some characteristics of a perfectly competitive market

• industry is fragmented — many firms and many buyers; no one is important

• products are homogeneous

• perfect information about prices. all are price takers, market price is followed

• no restrictions on entry into the market (free entry)

What is the shutdown decision?

As long as TR < TVC or P < AVC

Profit = ?

total revenue = total cost

Total revenue = ?

P x Q (amount of money the firm brings in form the sale of its outputs)

Marginal revenue

change in TR resulting from a one-unit increase in the quantity sold

What leads to a negative profit?

When output level is too low, revenue is not high enough to cover fixed costs