Studied by 16 people
what is production?
converting input into output
what are fixed resources?
resources that don’t change with the quantity produced
what are variable resources?
resources that do change with the quantity produced
what is the short run?
period of time too short for a firm to change its maximum potential level of production; at least one resource is fixed, plant/capacity size is NOT changeable
what is the long run?
period of time long enough for a firm to change its maximum potential level of production; all resources are variable, no fixed resources, plant/capacity size is changeable
input for short run
fixed input
input for long run
enough time to change input
what does a firm need to do to earn profit?
make products (output)
what are inputs
the resources used to make output
what are input resources also called
factors
what is total physical product (TP)
total output or quantity produced
what is marginal product
additional output generated by additional inputs (workers)
what is average product
output per unit of input
what is the formula for marginal product
change in total product / change in inputs
what is the formula for average product
total product / units of labor (# workers)
what is the law of diminishing marginal returns
as variable resources (workers) are added to fixed resources, additional output produced from each additional worker will eventually fall
what is stage one in graphing production
increasing marginal returns
what happens during the increasing marginal returns phase of a graph
MP rises, Tp increases at an increasing rate, all because of specialization
what is stage two in graphing production
decreasing marginal returns
what happens during the decreasing marginal returns phase of a graph
MP falls, TP increases at a decreasing rate, because of fixed resources; each worker adds less and less
what is stage three in graphing production
negative marginal returns
what happens during the negative marginal returns phase of a graph
MP is negative, TP decreases, all because workers get in each others’ way
what are the all of the economic total costs?
total fixed costs (FC), total variable costs (VC), total costs (TC)
what are all of the economic per unit costs?
average fixed costs (AFC), average variable costs (AVC), average total costs (ATC), marginal costs (MC)
fixed costs
costs for fixed resources that DON’T change with amount produced
what are some examples of fixed costs
rent, insurance, manager salaries
formula for average fixed costs
fixed cost / quantity
variable costs
costs for variable resources that DO change as more or less is produced
what are some examples of variable costs
raw materials, labor, electricity
what is the formula for average variable costs
variable costs / quantity
total cost
fixed cost + variable cost
average total cost
total cost / quantity OR average fixed cost + average variable cost
marginal cost
additional costs of each additional output
what are some examples of marginal costs
production of 2 more units of output increases cost from $100 → $120, MC is $10
what is the formula for marginal cost
change in cost / change in quantity
why is the MC curve U - shaped
because of diminishing marginal returns
why does the additional costs of the first units produced fall?
increasing marginal returns
what happens to the marginal cost as production increases?
it increases because each worker adds less and less
when does the MC curve intersect the ATC curve
at the ATC’s lowest point
what happens when the marginal cost is below average
pulls average down
what happens when marginal cost is above average
pulls average up
what is the long run used for
planning for firms to identify which size factory results in the lowest per unit cost
economies of scale
as production increases, long-run average total cost decreases
why do economies of scale occur?
firms that produce more can better use mass production techniques and specialization
why does long run average cost decrease in the economies of scale
mass production techniques are used
constant returns to scale
long run average cost is as low as it can get
diseconomies of scale
long run average costs increase as the firms get too big and difficult to manage
why doesn’t the law of diminishing marginal returns apply in the long run
there are no fixed resources
what is the profit formula
total revenue - total cost
what is the total revenue formula
price output x quantity sold
total cost
cost of all inputs used
implicit cost
a cost that is measured in the cost of forgone opportunities
explicit costs
a cost that requires paying out money
how are implicit costs related to opportunity costs
what is forgone when you choose one thing over another
opportunity cost
explicit cost + implicit cost
what is the accounting profit formula
business’s total revenue - explicit costs and depreciation
what is the economic profit formula
business’s total revenue - opportunity cost of its resources
why do businesses face implicit costs
they don’t use their capital in other ways, time + energy is devoted to the businesses
what does a positive economic profit indicate?
the person is better off/gaining from what they are already doing
what does a negative economic profit indicate
the person would be better off if they devoted their time and money somewhere else
normal profit
economic profit of zero
why would an economic profit of zero be a good thing
a firm would be gaining just enough to keep doing what they are doing and would not be better off doing something else
what will rational firms use to ensure profit marginalization?
marginal analysis
what is the goal of every business?
to maximize profit
what must a firm do in order to maximize profit
make the right output
when should firms continue to produce until
marginal revenue equals the marginal cost
how do firms maximize profit
setting quantity where marginal revenue equals marginal cost
marginal revenue
the change in total revenue generated by an additional unit of output
formula for marginal revenue
change in total revenue / change in quantity of output
what is the shut down rule
a firm should continue to produce as long as the price is above the AVC or TR > TVC
under what circumstances will firms still operate in the short run
price > AVC or their loss is less than their fixed cost
when should a firm shut down
when the price falls below AVC because the firms can’t produce if they don’t pay workers
why should a firm shut down if their price is below AVC
the firm has a loss that is bigger than their fixed costs
sunk cost
a cost that has already been incurred and cannot be recouped
what is important to remember about sunk costs?
ignore them and move forward
why do firms enter a market in the long run
if there are profit making opportunities
when will a firm exit a market
if they anticipate economic losses
barriers to entry
factors that prevent new firms from entering a given market
what does having low barriers generally entail for markets
more competition (many firms) individual firms make less profit
what does having high barriers generally entail for markets
less competition (few firms) and individual firms make more profit
example of firm with low barriers to entry
coffee shops
example of firm with high barriers to entry
car manufacturers
normal profit
in an efficient competitive market, firms that have identical products make this
what will firms do in the long run
firms enter to earn profit, so supply increases in the industry
constant cost industry
new firms entering the market does not increase the costs for firms already in the market
increasing cost industry
new firms enter the market increase costs for firms already in the market
what does the long run supply look like graphically in a constant cost industry
horizontal
what does the long run supply look like graphically in an increasing cost industry
upward sloping because the ATC increases
productive efficiency
producing at the lowest possible cost (minimum amount of resources used)
where is productive efficiency graphically
price = minimum ATC
allocative efficiency
producing at the amount most desired by society (allocating resources towards products society wants)
where is allocative efficiency graphically
price = marginal cost
when are perfectly competitive firms allocatively and productively efficient
in the long run
when are perfectly competitive firms only allocatively efficient and not productively efficient
in the short run
what is the MC curve above AVC
a short-run supply curve
what does per unit tax affect
variable costs (MC, AVC, and ATC)
does a per unit tax affect quantity produced
yes
lump sum tax/subsidy
only affects fixed costs (AFC, ATC); MC stays the same
do lump sum taxes affect the quantity produced
no
what does a change in fixed cost cause a shift in
ATC and AFC
Note 
Flashcard (76)