econ test 4

What is the objective of a firm?

to maximize profit (profit= total revenue- total cost)

What is the difference between economic profit and accounting profit?

accounting: revenue minus explicit costs, includes money actually paid, usually higher

economic: revenue minus explicit and implicit costs, includes opportunity costs, usually lower

Define the production function

shows the relationship between the number of inputs used (workers, materials, machines) and the amount of output produced.

What is diminishing marginal product?

It occurs when adding more workers causes each additional worker to produce less extra output than the previous worker.

What items are included in a firm’s costs of production?

wages/salaries, rent, raw materials, equipment, utilities, interest and other expenses, opportunity costs of resources owned by the firm.

What are fixed and variable costs?

(FC) costs that do NOT change when the quantity produced changes. ex: rent, insurance, certain equipment costs

(VC) costs that change depending how much the firm produces. ex: raw materials, hourly labor, packaging

Measures of costs

total cost (TC) - FC + VC

average fixed cost (AFC) - FC/quantity

average variable cost (AVC) - VC/quantity

average total cost (ATC) - TC/ quantity

marginal cost (MC) - change in TC/change in quantity

What is the shape of a typical firm’s cost curves?

AFC: always slopes downward

AVC: usually U-shaped

ATC: U-shaped

MC: usually U-shaped

What is the meaning of average cost and marginal cost, and how are they related

ATC: the cost of producing one unit on average.

MC: the additional cost of producing one more unit. (crosses average total cost at its lowest point)

Define costs in the short run and long run

short run: at least one input if fixed, a firm cannot change everything immediately.

long run: all inputs are variable, a firm can change its factory size, equipment, workers, etc.

What are economies are diseconomies of scale?

economies- when a company increases production and its average total cost decreases. (a large factory can produce products more cheaply per unit)

diseconomies- when a company increases production and its average total cost increases. (a company becomes too large, make management harder)

What characteristics make a market competitive?

1. many buyers and sellers

2. products are identical or very similar

3. buyers and sellers have good information

4. firms can freely enter or exit the market

Definition of a competitive market.

a market with many buyers and sellers where no single buyer or seller can control the market price.

Measures of revenues: average revenue and marginal revenue

AR: total revenue (TR) / quantity sold.

MR: change in TR/ change in quantity sold

What is the competitive firm’s supply curve?

marginal cost curve above its average variable cost because firms produce where price equals marginal cost, as long as price covers average variable cost.

How do competitive firms decide how much output to produce?

a firm maximizes profit by producing the quantity where: MR = MC, in perfect competition, MR = price

How is the marginal cost curve related to the firm’s supply decision?