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law of diminishing marginal returns
answer
as variable resources are added to fixed resources, additional output produced from each new input will eventually fall
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three stages of returns
answer
increasing, decreasing, negative
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short-run
answer
period in which at least one resource is fixed
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long-run
answer
all inputs are variable
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marginal returns to scale
answer
change in outputs as inputs change
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economies of scale
answer
change in costs as outputs change due to mass production --> long run average cost falls
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returns to scale
answer
increasing: output more than doubles
constant: output doubles
decreasing: output less than doubles
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constant economies of scale
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long-run ATC is as low as possible
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diseconomies of scale
answer
ATC goes up due to decisions based on numbers, not production factors
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total revenue
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price x quantity
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profit
answer
total revenue - total cost
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accounting profit
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total revenue - accounting cost (explicit costs)
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economic profit
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total revenue - economic costs (explicit and implicit costs)
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normal profit
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economic profit = 0, always long run goal
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shut down rule
answer
P > ATC = profit
P = ATC = normal profit (break even)
ATC > P > AVC = minimize loss
P = AVC = lowest operating price
P < AVC = shut down
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short-run supply curve
answer
MC > AVC
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perfect competition characteristics
answer
many small firms
identical products (perfect substitutes)
low barriers
seller has no need to advertise
firms are "price takers"
firms have no control over price
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demand for perfect competition
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perfectly elastic
MR = D = AR = P
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shifting costs
answer
per unit tax or subsidy shift MC, AVC, and ATC (quantity affected)
lump sum tax shift AFC and ATC (quantity not affected)
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perfect competition in long run
answer
firms enter if profit
firms exit if loss
econ profit = 0
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