Econ Exam 2

Average Product of Labor (for the chart)

= Total output / amount of labor

Marginal Product of Labor (To define and calculate in the chart)

Number of additional products produced as a result of additional labor, the incremental amount of the average product of labor

Marginal Rate of Technical Substitution of Labor and Capital

= Marginal Product of Capital/ Marginal Product of Labor

Marginal Product of Capital

=

Marginal Product of Labor

=

Marginal Product of Capital / Marginal Product of Labor

=

= Price of capital / price of labor

For the chart: Total Variable Cost (TVC)

= Total cost - Total fixed cost (TC - TFC)

For the chart: Total Cost (TC)

= Total fixed cost - total variable cost (TFC +TVC)

For the chart: Marginal Cost (MC)

= difference between each incremental total cost (TC1 - TC2)

For the chart: Average Fixed Cost (AFC)

= Total fixed cost / output (TFC/q)

For the chart: Average variable cost (AVC)

= Total variable cost / output (TVC/q)

For the chart: Average total cost (ATC)

= Total cost/output (TC/q)

Factors that affect the long run supply curve

Changes in:
- Production of technology
- Price/supply of inputs (land, labor, capital)

Four main assumptions of a perfectly competitive model

(1) Large number of buyers and sellers
(2) Free entry and exit
(3) Homogeneous product
(4) Full information

Marginal cost (MC)

= Price (P)

Total profit (π)

= Total revenue (TR) - total cost (TC)
= P * Q - AC *Q

Total revenue (TR)

= P * Q

=

Break even point

MC = ATC

if the price is higher than break even then profits will be 0

ATC

= TC / Q

Shut down price

MC = AVC

Perfectly competitive price and quantity

P = a - bQ

P = MC

Monopoly price and quantity

P = a - 2bQ

Three necessary conditions for successful price discrimination

(1) Have a monopoly
(2) be able to tell the difference between customer types
(3) be able to prevent resale

Four major determinants of the elasticity of an industry's demand for an input

The industry's demand for inputs is more elastic when...
(1) ...the demand for the industry's products is more elastic
(2) ...the inputs have better substitutes
(3) ...there is more time for the firm to adjust

(4) the industry's demand for *one input* is more elastic when the supply of the other inputs is more elastic

Production possibilities frontier (PPF)

Describes all the combinations of input 1 and input 2 that produce the same quantity of output

Land

input in production

natural resources

(ex) oil L

Labor

input in production

Effort of humans, time, muscle, brainpower

Capital

input in production

the output of one production process that's used as an input in another production process

there are two categories of capital: human capital and physical capital HU

Human capital

People being taught or trained

Physical capital

tangible, touchable, not the byproduct of the learning process

Marginal revenue

the addition to total revenue for selling one more unit of a product

Marginal cost

the addition to total cost from selling one more unit of a product

isocost

all the combinations of inputs that cost a firm the same amount of money i

isoquant

all the combinations of inputs that produce the same quantity of output

fixed costs

part of cost that do not change when the level of output changes su

sunk costs

costs you cannot avoid by producing a quantity of 0

variable costs

part of cost that does change with the quantity produced

long run

enough time so that everything changes

no fixed costs

no constraints of firms behavior

in the long run all firms make 0 profit

short run

a period of time in which something can change (any time less than the long run)

Production When Only One input is Variable

has both fixed costs and variable costs

Potential for positive economic profit

monopoly

a single seller in a market c

classical monopoly

single firm sets one price for all their customers

Policy solution: break it up, prevent it from forming, make it illegal, force it to be a competitive industry

natural monopoly

industry that would not exists if it were not a monopoly

where average cost is falling everywhere in the neighborhood of the demand curve

Total surplus is better in a protected natural monopoly than in a competitive industry

no natural monopolies in the long run

have high initial fixed costs and low (or 0) marginal costs

(ex) vaccine industry, movie industry

price discriminating monopoly

single firm that sets different prices for different customers

first degree price discrimination

everybody's price is different s

second degree price discrimination

volume discount

third degree price discrimination

different groups/categories of people get different prices

monopsony

where there is a single buyer in a market

duopoly

industry where two firms have a monopoly

oligopoly

industry where a small number of firms have a monopoly

labor demand

what the firm is willing to pay their workers depends on what the workers will bring to the firm

solutions to natural monopolies

Patents, trademarks, copyrights, regulated rate of return (RRR), two tier pricing (TTP)o

orphan drug

Nickname for any kind of medication/treatment for a disease that not a lot of people get

No firms want to go into this industry because there are no profits and would loose money

The government might go into the market if benefits outweigh the cost

factor markets

markets to the inputs of the production process

compensating wage differentials

differences in wages paid that are created by the forces of supply and demand when workers view some jobs are intrinsically more attractive than others


Employers will pay a premium for job/working conditions and location (not for worker characteristics)

Three factors that affect wages workers are willing to acccept

(1) Worker characteristics
(2) job/working conditions
(3) location

Labor market discrimination

wage differentials
hiring discrimination

marginal value product

additional value a frim can make form working one more unit of labor

MVP

=

aggregate industry demand

total demand from al firms in an industry R

Regulated rate of return (RRR)

Policy strategy/solution for natural monopolies

the government decided a maximum price that the monopolists are allowed to charge - Tries to set prices as low as they can go without driving the firms out of business

maximizes total surplus in society

creates additional consumer surplus

two tier pricing (TTP)

policy strategy for natural monopolies

Covers the loss of the firm

Two parts
- Charge marginal cost per unit
- Second fee/fixed cost to make sure firm does not loose money

Best solution

when marginal revenue is equal to marginal cost

firms are maximizing profit

when marginal revenue exceeds marginal cost

then firms should sell more because the cost of producing a product is less than what a firm is selling it for w

when marginal cost exceeds marginal revenue

firms are loosing money because its costing them more to product a product than how much they are selling it for