Econ Unit 2 Exam

Technology

Techniques firms have available to produce products

Explicit Cost & ex (2)

• Cost involves paying money to input owners when acquiring rights to use inputs

• Ex: Wages paid to laborers

Implicit Cost & ex (2)

• Non-monetary opportunity cost of using inputs

• Ex: Such as the income an owner-manager could earn if they worked for someone & the interest an owner-manager invests it own financial capital.

Explicit costs of running firms are EASY to identify:

Just look at what firm spends money on.

Finding implicit costs & ex (2)

• Identify resources used in firm that could have been used for another beneficial purpose

• Ex: I could’ve earned $120k! (opportunity cost)

q of some product producing =

= f(q inputs that went into making product)

Marginal Product

Extra quantity produced when using extra quantity of input.

Marginal Product of Labor equation and explanation (2)

• Marginal Product of Labor =(Δq products / Δ q labor)

• Extra quantity of product from adding extra quantity of labor.

Δ meaning

Means extra

Diminishing marginal product / returns

Marginal Product decreases over time

Firms pick up ____ employees FIRST and ____ employees LAST

• Best

• Worst

Marginal Product Graph looks like

Looks like Parabola

Variable Costs

Costs that CHANGE as quantity of product (output) produced changes

Fixed Cost

Costs that DON’T CHANGE as quantity of product (output) produced changes (varies)

Total Cost

Cost of ALL INPUTS a firm uses in production of a product

TC = FC + VC in _____ Run

Short Run

TC = VC in _____ Run

Long Run since fixed resources DO NOT exist in long run

1st Equation of MC Product

MC product = Δ C / Δ q product

2nd Equation of MC Product

MC Product = ΔTVC/ Δq product

2nd Equation in writing of MC Product

Price of variable input / M Product of variable input

3rd Equation of MC Product

Wage per labor/ MP labor

The BIGGER MP labor gets…

The SMALLER the MC Product gets

As you hire more people

MP labor DIMINISHES

As more of product is produced, MC Product

MC Product INCREASES

Increasing MC Product = caused by

Caused by diminishing MP labor

If marginal value of what was added = LESS than average value, then

Average value of thing will FALL

If marginal value of what was added = GREATER than average value, then

Average value of thing will RISE

The average value of something will ____ change as much as Marginal Value changes

NEVER change as much as

Marginal Cost (MC) Curve equation

ΔTVC/ Δq

On graph, MC = AVC, AVC is @ ______

AVC is @ MINIMUM

3 types of average total costs

1. Average VARIABLE Cost (AVC)

2. Average TOTAL cost (ATC)

3. Average FIXED cost (AFC)

TC equation

TC/q = TVC + FC/q

AFC Equation

AFC = F̄C̄/q

On last unit produced, MR = MC. Only this can be true because

Because business will be making profit

If MR > MC, or MR < MC, firm ____ be producing a profit maximizing or loss minimizing

CAN’T be producing a profit maximizing or loss minimizing

Perfect competitive firm, degree of compet, def, ex + price ______ (4)

• Highest degree of competitiveness for that one firm

• One firm among many firms producing an identical product

• Ex: Agriculture

• Price TAKER

Monopolist firm, def, degree of compet (2)

• Only one firm producing a product

• Lowest degree of competitiveness (Almost no competitiveness for that one firm)

Monopolistic-competitive firm, def & degree of compet (2)

• One firm among many firms producing a similar product not an identical product

• High degree of compet but LESS than perf compet firm

Oligopolist firm, def & degree of compet (2)

• One firm among a few firms producing a product

• Low degree of compet.

All other types are price ____ (figure out best price to charge) while perf compet firm is price ____ (2)

• Price SEARCHERS

• Price TAKER

Perfectly competitive firm line = (2)

• Horizontal (price curve)

• Cannot raise price, MUST CONFORM

Price above TAC =

= Profit

Price below TAC =

= Loss

Economic profit = Total ….

= Total revenue MINUS total cost (P - ATC)

If on last unit produced MR will ____ MC, in order to profit Maximize or Minimize

MR=MC

Unit costs CANNOT be ____ than described by curve of assumption

CANNOT be LOWER

Perf compet faces ___________ to enter or exit market

No real barriers

Whenever price is ____ VC, firm will ______, not worth it. (2)

• BELOW

• SHUT DOWN

Productive efficiency (Technical Pov)

Firm produces product at LOWEST POSSIBLE AVERAGE COST (product efficient)

Allocative Efficiency (2)

• Producing quantity optimal to society (What makes society best off)

• Marginal Benefit of consumers = marginal cost of producing it

Price > ATC =

Price > ATC = Economic PROFIT

Price < ATC =

Price < ATC = Economic LOSS

(Price = ATC) =

Price = ATC = NO GAIN, NO LOSS

Socially Optimal Equation

Socially Optimal: P=MC

Perfect Competitor is Socially Optimal Because…

If P = MR, and MR = MC, then P = MC

In a Monopoly, MR must always be ____ than Price and cannot _____

Must always be LESS than Price and CANNOT BE SAME

Price Searchers are NOT socially optimal because…

If P > MR, and MR = MC

Then P>MC, which is Not Socially Optimal