ECO 2023 FSU Exam 2 Study Guide HAMMOCK

Explicit Costs

Costs that involve direct monetary payment by a firm for resources used in production.

Implicit Costs

Costs that do not require direct monetary payment but represent the opportunity cost of using resources owned by the firm.

Economic Costs

The total cost of production, including both explicit and implicit costs.

True Cost Of Production

All implicit and explicit costs must be considered to determine the actual cost of producing goods or services.

Economic Profit

Total revenue minus both explicit and implicit costs.

Accounting Profit

Total revenue minus only explicit costs.

Total Revenue

The total amount of money received from selling goods or services.

Economic Vs Accounting Profit

Economic profit considers all opportunity costs; accounting profit only considers explicit costs.

Zero Economic Profit

Occurs when a firm covers all opportunity costs but earns no extra profit.

Total Revenue (TR) Formula

TR = Price × Quantity

Economic Profit Formula

Economic Profit = Total Revenue − (Explicit Costs + Implicit Costs)

Accounting Profit Formula

Accounting Profit = Total Revenue − Explicit Costs

Profit Formula

Profit = Total Revenue − Total Cost

Profit (Alternate Formula)

Profit = (Price − ATC) × Quantity

Marginal Cost (MC) Formula

MC = Change in Total Cost ÷ Change in Quantity

Marginal Revenue (MR) Formula

MR = Change in Total Revenue ÷ Change in Quantity

Average Fixed Cost (AFC) Formula

AFC = Total Fixed Cost ÷ Quantity

Average Variable Cost (AVC) Formula

AVC = Total Variable Cost ÷ Quantity

Average Total Cost (ATC) Formula

ATC = Total Cost ÷ Quantity

Total Cost (TC) Formula

TC = Fixed Cost + Variable Cost

Output Decision Rule (Perfect Competition)

Produce where MR = MC

Shutdown Point Rule

Shut down if Price < AVC

Profit-Maximizing Rule (All Markets)

Produce where MR = MC

Allocative Efficiency Condition

P = MC

Productive Efficiency Condition

P = Minimum ATC

Long-Run Equilibrium (Perfect Competition)

P = MC = Minimum ATC

Normal Profit Condition

P = ATC

Short Run

A period in which at least one input, such as capital, is fixed.

Long Run

A period in which all inputs can be varied.

Total Product

The total quantity of output produced by a firm.

Marginal Product

The additional output produced by using one more unit of a specific input.

Average Product

Total product divided by the quantity of input used.

Increasing Marginal Returns

Additional units of input increase output at an increasing rate.

Diminishing Marginal Returns

Additional units of input increase output at a decreasing rate.

Fixed Costs

Costs that do not change with the level of output.

Variable Costs

Costs that vary with the level of output.

Total Cost

Fixed costs plus variable costs.

Average Fixed Cost (AFC)

Fixed cost divided by quantity of output.

Average Variable Cost (AVC)

Variable cost divided by quantity of output.

Average Total Cost (ATC)

Total cost divided by quantity of output.

Marginal Cost (MC)

The additional cost of producing one more unit of output.

MC Calculation

Change in total cost divided by change in quantity produced.

MC Vs Average Values

When MC < ATC or AVC, averages decrease; when MC > ATC or AVC, averages increase.

Short-Run Average Cost Curve

U-shaped curve showing cost at different output levels for a specific plant size.

Long-Run Average Cost Curve (LRATC)

Envelope of short-run average total cost curves for all plant sizes; generally U-shaped.

Economies Of Scale

Cost advantages realized when output increases, reducing average cost.

Diseconomies Of Scale

Increased average cost when output increases beyond an optimal level.

Constant Returns To Scale

Average cost remains unchanged when output increases.

Minimum-Efficiency Scale

The output level at which long-run average total cost is minimized.

Perfect Competition

A market structure in which many firms sell identical products, no single firm can influence price, and firms are price takers.

Characteristics Of Perfect Competition

Many buyers and sellers, identical products, free entry and exit, perfect information, and price-taking behavior.

Market Efficiency

Perfectly competitive markets achieve both productive and allocative efficiency.

Price Takers

Firms that must accept the market price and cannot influence it.

Marginal Revenue (MR)

The additional revenue from selling one more unit of output.

Average Revenue (AR)

Total revenue divided by quantity sold.

Perfectly Competitive Firm Demand

For a perfectly competitive firm, AR = MR = price.

MR Curve

Horizontal line at the market price for a perfectly competitive firm.

Output Determination

Firms produce the quantity where MR = MC to maximize profits.

Allocative Efficiency

Occurs when P = MC, meaning resources are allocated to goods most valued by consumers.

Profit

Total revenue minus total cost.

Normal Profit

The level of profit necessary to keep resources employed in their current use; zero economic profit.

Profit Calculation

Profit = (P − ATC) × Q.

Shutdown Point

The output level at which total revenue just covers variable costs.

Short-Run Supply Curve

The portion of a firm's MC curve above AVC.

Market Supply

The sum of all firms' short-run supply curves in a perfectly competitive industry.

Economic Profit And Market Entry

When firms earn economic profits, new firms enter the market, increasing supply and lowering prices.

Economic Loss And Market Exit

When firms incur losses, some exit the market, reducing supply and raising prices.

Long-Run Equilibrium

Occurs when firms earn zero economic profit and have no incentive to enter or exit the market.

Productive Efficiency

Occurs when firms produce goods at the lowest possible cost (P = minimum ATC).

Long-Run Supply Curve

Relationship between price and quantity supplied when firms can freely enter or exit in the long run.

Constant-Cost Industry

Industry where input prices remain unchanged as output expands or contracts.

Increasing-Cost Industry

Industry where input prices rise as more firms enter, increasing long-run price.

Decreasing-Cost Industry

Industry where input prices fall as industry expands, lowering long-run price.

Monopoly

A market structure with a single seller and no close substitutes.

Characteristics Of A Monopoly

One firm, unique product, high barriers to entry, and price-making power.

Market Inefficiency

Monopolies restrict output and raise prices above competitive levels.

Government Regulation

Used to prevent excessive monopoly pricing or ensure efficiency.

Total Revenue (TR)

Total income a monopoly earns from selling its output.

MR Curve Under Monopoly

Lies below the demand curve because the monopoly must lower price to sell more units.

Profit-Maximizing Output (Monopoly)

Occurs where MR = MC.

Price Setting (Monopoly)

The monopoly sets price from the demand curve at the profit-maximizing quantity.

Deadweight Loss

Loss of total surplus caused by monopoly pricing above MC.

Allocative Inefficiency (Monopoly)

Monopoly output is less than the allocatively efficient quantity.

Productive Inefficiency (Monopoly)

Monopoly does not produce at minimum ATC.

Price Discrimination

Selling the same product to different consumers at different prices not based on cost differences.

First-Degree Price Discrimination

Charging each consumer the maximum they are willing to pay, extracting all consumer surplus.

Second-Degree Price Discrimination

Charging different prices based on quantity purchased or product version.

Third-Degree Price Discrimination

Charging different prices to consumer groups based on price elasticity of demand.

Natural Monopoly

A market where one firm can supply the entire market at lower cost than multiple firms.

Regulation At Normal Profit Price

Price set so firm earns zero economic profit (P = ATC).

Regulation At Competitive Price

Price set equal to MC to achieve allocative efficiency.

Monopolistic Competition

A market with many firms selling similar but not identical products.

Characteristics Of Monopolistic Competition

Many firms, differentiated products, some price control, and easy entry and exit.

Product Differentiation

Process of distinguishing products to make them appear unique.

Non-Price Competition

Marketing strategies such as branding and advertising to attract consumers.

Firm Demand In Monopolistic Competition

Downward-sloping due to product differentiation.

Profit Maximization (Monopolistic Competition)

Occurs where MR = MC.

Long-Run Adjustment (Monopolistic Competition)

Entry or exit drives profits to zero in the long run.

Allocative Inefficiency (Monopolistic Competition)

P > MC in equilibrium.

Consumer Benefit (Monopolistic Competition)

Greater product variety compensates for some inefficiency.