unit 3 perfect competition

production function

shows the relationship between the quantity of inputs a firm uses and the quantity of output it produces

variable inputs

can be changed in the short-run to change output… relatively flexible ex: workers, raw materials, inventory

fixed inputs

cannot be changed in the short-run to change output… capital investment is larger and expensive ex: machines, factories, real estate.

short run

a period of time that is too short to change a fixed input

long run

a period of time long enough for all inputs to be changed

marginal product (MP)

additional output produced by an additional variable output

average product (AP)

amount of output produced per unit of input

fixed costs (FC)

must be paid even when a firm’s output is zero ex: rent, insurance, lease on machinery

variable cost (VC)

a cost that changes as output changes ex: materials, labor

marginal cost (MC)

the additional cost of producing one more unit of output

returns to scale

the change in output that results when all inputs are increased by the same proportion… refers to size

revenue

money a firm receives for selling its finished goods and services

profit

the revenue remaining after a firm pays all of its production costs… the money you leave with

explicit costs

out of pocket expenses ex: $ spent on labor, materials, etc.

implicit costs

“income forgone” or the $ value of your opportunity cost… resources already owned

normal profit

occurs when a firm’s total revenue covers both explicit and implicit costs… economic profit = $0

profit maximization

find where profit is the greatest

characteristics of perfect competition

• many small firms

• same products (homogenous)

• low barriers to entry

• no non-price competition (advertisements)

• buyers and sellers are price takers

• ex: agriculture

price takers

price set by the industry

constant cost industry

an industry where expanding production (new firms entering) does not increase input costs for firms already in the market… input prices stay the same

increasing cost industry

an industry where expanding production increases input costs for firms already in the market… price rises because resources become scarcer ex: mining

efficiency

the optimal use of society’s scarce resources

productive efficiency

producing at the lowest possible cost. P = minimum ATC

allocative efficiency

producing at the amount most desired by society. P = MC