question
What is production?
answer
The process by which inputs (resources, land, labor, capital) are combined, transformed, and turned into output.
question
What is a firm?
answer
An organization that produces a good or service to meet perceived demand.
question
What are some characteristics of perfectly competitive firms?
answer
There are many firms, products on the market are homogenous therefore no single firm controls price, all households have perfect knowledge and there are no barriers to entry.
question
What is the first basic decision a firm makes?
answer
How much output to supply.
question
What is the second basic decision a firm makes?
answer
Which production technology to use.
question
What is the third basic decision a firm makes?
answer
How much of each input should they demand.
question
What is profit?
answer
Economic profit is the difference between total revenue and total cost. pi=TR-TC
question
What is total revenue?
answer
How much you received from the sale of your product. TR=pxq
question
What makes up total cost?
answer
1) out of pocket costs 2) a normal rate of return on (financial) capital 3) opportunity cost of each factor of production.
question
What is a normal rate of return?
answer
A rate of return that just keep owners and investors satisfied. It should be nearly the same as the interest rate on risk free government bonds.
question
What is a bond?
answer
A loan to someone that is paid back with interest.
question
What are economics in the short run?
answer
Has two conditions: the firm is operating under a fixed factor of production (usually capital). Firms can neither enter or exit the industry.
question
what are econoterm-15mics in the long run?
answer
There are no fixed factors of production. Firms can increase or decrease their scale of operations; new firms may enter and existing firms may exit.
question
What are the three basic decisions of a firm?
answer
Price of the output
The technique of production
Input prices
question
Price of output determines_________?
answer
Total revenue (pxq=TR)
question
the techniques of production available...
Are we going to be __________ or ____________.
answer
Labor intensive, Capital intensive
question
What is the optimal method of production?
answer
The production method that minimizes cost MPl/Pl=MPk/Pk
question
What is production function(total production function)?
answer
A mathematical expression of a relationship between inputs and outputs--units of our total product (output) as a function of units of input.
question
What is marginal product?
answer
The additional output that can produced by adding one more unit of a specific input.
question
What is average product?
answer
The average amount produced by each unit of a variable factor of production. For example: total output/# of workers.
question
What is the law of diminishing marginal returns?
answer
When an additional unit of a variable input is added to fixed input, eventually the additional output from the additional input is going to fall.
question
If labor becomes expensive, what will firms do?
answer
Substitute capital for labor.
question
What are the two things that determine the costs of production?
answer
Available technologies and price of input.
question
What is a isoquant?
answer
A graph that shows all combinations of capital and labor that can be used to produce a given level of output.
question
What is the marginal rate of technical substitution?
answer
The rate at which a firm can substitute capital for labor and keep the same level of output (MPl/MPk) which = the slope of the isoquant.
question
What is a isocost line?
answer
A graph that shows all combinations of capital and labor that are available for a given total cost.
question
What is a fixed cost?
answer
Any cost that does not depend on the firms level or output, even if Q=0. Firms cannot avoid or change theses costs--rent, tax's, mortgage payment.
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What is a variable cost?
answer
A cost that does depend on the level of production, costs that changes as output changes---workers, materials-eggs, butter, and milk.
question
What is total cost?
answer
The total of fixed costs added to the total variable costs. Tc=TFC+TVC or TC=FC+VC
question
What is total fixed cost?
answer
The total summation of all costs that do not change with output. This is sometimes called "overhead" or "sunk costs". Firms have no control over theses in the short run.
question
What is average fixed costs?
answer
The total fixed cost divided by the number of units of output. AFC=TFC/q or AFC=FC/q
question
What is total variable cost?
answer
The total summation of all costs that vary with output in the short run.
question
What is average variable cost?
answer
The total variable cost divided by the number of units of output. AVC=TVC/q or VC/q
question
What is average total cost?
answer
The total cost divided by the number of units of output. ATC=TC/q
question
TC=
answer
TFC+TVC
question
ATC=
answer
TC/q
question
AVC=
answer
TVC/q
question
AFC=
answer
TFC/q
question
What is the profit maximizing level of output?
answer
When Marginal Cost (MC)= Marginal Revenue (MR)
question
Any firm will be doing one of three things...
answer
Making positive economic profits pi=+, Breaking even pi=0, having economic loss pi=-.
question
If a firm is suffering an economic loss, they will fall into two categories...
answer
Continue to operate or shut down(they still have to pay fixed costs)
question
What is the Net operating revenue?
answer
Where the demand curve is higher than average variable cost.
question
What is the shut down point?
answer
When you hit zero dollars in Net Operating Revenue.
question
What is the long run?
answer
Firms can choose any scale of production- there are no fixed factors of production.
question
What is the long run average cost curve?
answer
A graph that shows the different scales on which a firm can choose to operate in the long run.
question
What is an increasing return to scale (Economies of scale)?
answer
An increase in a firms scale of production leads to a lower average cost per unit produced.
question
what is a constant return to scale?
answer
An increase in a firms scale of production has no effect on average costs per unit produced.
question
What is a decreasing return to scale (diseconomies of scale)?
answer
An increase in a firms scale of production leads to higher average costs per unlit produced.
question
What are the two sources of economies of scale?
answer
Technology and the size large companies buy inputs in volume at discounted prices and can ship in bulk.
question
What is the optimal scale of plant?
answer
The scale of a plant that minimizes average costs *competition forces firms to produce at the optimal scale in the long run.
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