Video: Microeconomics Unit 3 Summary - Production & Perfect Competition

What does a production function show?

The relationship between the quantity of labor hired and the quantity of output produced.

What are the three phases of the law of diminishing marginal returns?

Increasing returns, diminishing returns, and negative returns.

How is marginal product calculated?

By taking the change in total product divided by the change in quantity.

What happens to total product as more workers are hired when diminishing returns set in?

Total product increases but at a decreasing rate.

What are the two main categories of costs for businesses?

Fixed costs and variable costs.

What are fixed costs?

Costs associated with production that do not change with output.

What is marginal cost?

The change in total cost divided by the change in quantity.

Where does average variable cost intersect marginal cost?

At average variable cost’s minimum point.

What do we call the quantity at the minimum point of the average total cost curve?

Productively efficient quantity.

In the long run, what happens to all costs?

All costs become variable.

What type of efficiency do perfectly competitive firms exhibit in the long run?

Allocative efficiency and productive efficiency.

At what point is a firm maximizing profit?

Where marginal revenue equals marginal cost.

What are the qualities of a perfectly competitive market?

Many firms, identical products, low barriers to entry, firms are price takers.

What signifies economic profit for a firm?

When average total cost is less than equilibrium price.

How do firms reach long-run equilibrium when earning economic profits?

Firms enter the market, supply increases, and price decreases.

What happens in a long-run supply curve for a perfectly competitive market when demand increases?

New firms enter, increasing quantity at the same price.

What shape does the long-run supply curve take in a perfectly competitive market?

A horizontal line at the minimum of the average total cost curve.