Costs of Production and Perfect Competition

These flashcards cover key concepts about the costs of production, the Law of Diminishing Marginal Returns, market structures, and the characteristics of perfect competition.

What does production entail?

Converting inputs into output.

What are inputs in production?

Resources used to make outputs, also called factors.

What is the Marginal Product?

The additional output generated by additional inputs.

Define the Law of Diminishing Marginal Returns.

As variable resources are added to fixed resources, the additional output produced from each new worker will eventually fall.

What is Total Physical Product (TP)?

Total output or quantity produced.

Define Average Product (AP).

Output per unit of input.

What occurs in Stage I of Returns?

Increasing Marginal Returns; MP rising and TP increasing at an increasing rate due to specialization.

What is happening in Stage II of Returns?

Decreasing Marginal Returns; MP Falling and TP increasing at a decreasing rate due to fixed resources.

What is Stage III of Returns characterized by?

Negative Marginal Returns; MP is negative and TP is decreasing.

What are Accounting Profits?

Total Revenue minus Accounting Costs (explicit costs only).

What do Economists consider when calculating economic profit?

Both explicit and implicit costs.

Define Short-Run in production context.

Period in which at least one resource is fixed.

What happens in the long-run regarding resources?

All resources are variable, and plant capacity/size is changeable.

What happens to Average Total Costs when a firm increases plant capacity?

The long-run ATC curve is derived from all the different short-run ATC curves.

Define Economies of Scale.

Long run decreasing average total costs as output increases, due to mass production techniques and specialization.

What is the key feature of perfect competition?

Many small firms, identical products, and firms being price takers.

What does the Law of One Price state?

In an efficient market, all identical goods must have only one price.

Why are perfectly competitive firms price takers?

They cannot charge above the market price and will lose customers.

What is the impact of marginal cost (MC) on average total cost (ATC)?

When MC is below ATC, it pulls the average cost down; when MC is above ATC, it pulls the average up.

What is the profit-maximizing rule for firms?

Firms should produce until additional revenue equals additional cost (MR=MC).

Define Shutdown Rule for firms in short-run.

A firm should continue to produce as long as price is above average variable cost (AVC). When price falls below AVC, they should minimize losses by shutting down.