Unit 3 Flashcards

production is

production is

converting inputs into outputs

firms must make ---- to earn profit

products (output)

inputs are the ---- used to make outputs

resources

input resources are also called

factors

total physical product is

the total output or quantity produced

marginal product is

the additional output generated by additional inputs (workers)

marginal product formula

change in total product divided by change in input

average product

total product divided by units of labor

fixed resources

resources that don’t change with the quantity produced

variable resources

resources that do change with the quantity produced

law of diminishing marginal returns

as variable resources are added to fixed resources, the additional output produced per additional worker will decrease

three stages of return

1. increasing marginal returns

2. decreasing marginal returns

3. negative marginal returns

increasing marginal returns

marginal product is rising and total product is increasing at an increasing rate due to specialization

decreasing marginal returns

marginal product is falling and total product is increasing at a decreasing rate because of fixed resources (each worker adds less and less)

negative marginal returns

marginal product is negative and total product is decreasing because workers get in each others way

short run

at least one resource is fixed, production capacity is fixed

long run

all resources are variable, no fixed resources, production capacity is changeable

total costs

total fixed cost, total variable cost, total cost

per unit costs

average fixed costs, average variable costs, average total costs, marginal cost

fixed cost

cost for fixed resources that don’t change with the amount produced

average fixed cost (AFC) formula

fixed cost divided by quantity

variable cost

cost for variable resources that do change as more or less is produced

average variable cost (AVC) formula

variable cost divided by quantity

total cost

sum of fixed and variable costs

average total cost formula

total costs divided by quantity

marginal cost

additional cost of an additional output

marginal cost formula

change in total costs divided by change in quantity

ATC and AVC curves will

get closer but never touch

marginal product curve reasoning

more workers are hired → marginal product increases → law of diminishing marginal returns → marginal product decreases

MP and MC are mirror images

marginal cost curve reasoning

marginal cost of units produced decreases as marginal product increases, eventually increases due to diminishing marginal returns

MP and MC are mirror images

ATC shape reasoning

when MC is below average, it pulls ATC down and when MC is above average, it pulls ATC up, and this creates bowl curve

MC intersects the ATC at

the ATC’s lowest point

returns to scale

1. increasing

2. constant

3. decreasing

increasing returns to scale

when doubling input, output more than doubles

constant returns to scale

when doubling input, output doubles

decreasing returns to scale

when doubling input, output less than doubles

long run ATC curve is made up of

all the different short run ATC curves

why do economies of scale occur

firms that produce more can better use mass production techniques and specialization

LRATC - economies of scale

mass production techniques are used so LRATC falls

LRATC - constant returns to scale

LRATC is as low as it can get

LRATC - diseconomies of scale

LRATC increases as firm gets too big and difficult to manage

LRATC graph

downward slope → economies

constant slope → constant

upward slope → diseconomies

diminishing marginal returns don’t apply in the long run because

there are no fixed resources

total revenue formula

price x quantity

profit formula

total revenue - total cost

explicit costs

payments made by firms for using the resources of others, AKA out of pocket costs

implicit costs

opportunity costs that firms pay for using their own resources

accounting profit

total revenue - accounting costs

economic profit

total revenue - economic costs

profit maximizing rule

MR = MC

shut down rule

firms should continue to produce as long as price is above AVC

• if price is below AVC, minimize loss by shutting down bc loss is bigger than fixed coss

• shut down if P < AVC

marginal cost and supply

price increases → quantity increases

price decreases → quantity decreases

MC increase → supply decrease

MC decrease → supply increase

MC above AVC is a ---- supply cirve

short run

barriers to entry

factors that prevent new firms from entering a given market

low barriers → more competition → less profit per firm

high barriers → less competition → more profit per firm

normal profit

• no economic profit

• in an efficient competitive market, firms with identical products make a normal profit

four market structures

1. perfect competition

2. monopolistic competition

3. oligopoly

4. monopoly

imperfect competition markets

• monopolistic competition

• oligopoly

• monopoly

perfect competition characteristics

• many small firms

• identical products (perfect substitutes)

• low barriers

• seller has no need to advertise

• price takers → no control over price

types of barriers to entry

• economies of scale

  • only one electric company because they can make electricity at lowest cost

  • natural monopoly

• superior technology

• geography/ownership of raw materials

• government created barriers

  • patents

monopoly characteristics

• one large firm

• unique product (no close substitutes)

• high barriers

• monopolies are price makers

oligopoly characteristics

• a few (less than 10) large producers

• identical or differentiated products

• high barriers to entry

• price maker

• mutual interdependence

  • firms worry about decisions of competitors and use strategy

monopolistic competition characteristics

• relatively large number of sellers

• differentiated products

• some control over prices

• low barriers

• non-price competition (advertising)

why perfectly competitive firms are price takers

charge above market price → nobody will buy

charge below market price → not necessary because demand stays the same

• price is the same at all quantities demanded

• demand curve is perfectly elastic

price taker means

price is set by the industry

for perfect competition, MR =

MR = D = AR = P

for perfect competition, the demand curve is

industry → downward sloping line

firm → horizontal line

perfect competition firm profit

MC = MR intersection down to ATC

characteristics of MR = MC

• applies to all markets

• only applies of P > AVC

• can be restated as P = MC for perfectly competitive firms

per unit tax is an example of a ---- increase

variable cost

• causes supply to decrease

subsidy is an example of a ---- decrease

variable cost

• causes supply to increase

if fixed cost increase, quantity will

remain the same because MC/supply doesn’t change

per unit tax ---- affect the quantity produced

will

lump sum tax ---- affect the quantity produced

will not

change in fixed cost changes

ATC and AFC but not MC

change in variable cost changes

ATC, AVC, and MC

perfect competition in the long run

profit → firms enter

loss → firms leave

• all firms break even (make no economic profit)

• no economic profit = normal profit

• extremely efficient

no economic profit is the same as ---- accounting profit

positive

change in number of firms impacts market supply by

firms leave → price increases → quantity decreases

constant cost industry

entry of new firms into the market does not increase the costs for firms already in the market

in a constant cost industry, supply curve is

horizontal

in an increasing cost industry, the supply curve is

upward sloping

productively efficiency

producing at the lowest possible cost (P = min ATC)

allocative efficiency

producing at the amount most desired by society (P = MC)

long run perfectly competitive firm efficiency

allocative and productive

short run perfectly competitive firm efficiency

allocative but not productive