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Economic profit
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Economic Profit= Total Revenue - (explicit +implicit costs ) Takes opportunity cost into account
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Normal/Accounting profit
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Accounting Profit= Total revenue- explicit costs
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Production function
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the relationship between the quantity of inputs a firm uses and the quantity of output it produces
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Fixed input
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an input whose quantity is fixed for a period of time and cannot be varied
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Variable input
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an input whose quantity the firm can vary at any time
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Long run
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the time period in which all inputs can be varied
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Short run
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the time period in which at least one input is fixed
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Total product curve
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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of a fixed input
Quantity of output goes on vertical axis, quantity of input goes on horizontal axis- total product curve is upward sloping- more workers, more product. Slope is not constant though
Quantity of output goes on vertical axis, quantity of input goes on horizontal axis- total product curve is upward sloping- more workers, more product. Slope is not constant though
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Marginal product (MPL)
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additional quantity of an output that is produced by using one more unit of that input
MPL= change in quantity of output/ change in quantity of labor
Slope of total product curve shows our MPL
MPL= change in quantity of output/ change in quantity of labor
Slope of total product curve shows our MPL
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Diminishing returns to an input
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an increase in the quantity of an input (with all other inputs fixed) leads to a decline in the marginal product of that input - makes the MPL curve is negative- usually seen as fixed capital inputs and variable labor inputs
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Fixed cost (FC)
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a cost that does not depend on the quantity of output produced, it is the cost of a fixed input- basically something that the seller has to pay for no matter what
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Variable cost (VC)
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cost that depends on the quantity of output produced. It is the cost of the variable input- i.e. seller can decide how much they want to spend on labor.
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Total cost (TC)
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when you produce a given quantity of output, it is the sum of the fixed cost and the variable cost of producing that quantity of output.
Total cost= Fixed cost + Variable cost
TC= FC+VC
Total cost= Fixed cost + Variable cost
TC= FC+VC
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Total cost curve
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shows how total cost depends on the quantity of output - slopes upward due to the variable cost, the more output the more spent on the variable costs. The total cost curve gets steeper at the top due to diminishing returns of the variable input. - they aren't getting as much output for every worker added, so cost increases at same rate but quantity produced falls
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Marginal cost (MC)
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change in the total cost generated by producing one more unit of output MC= change in total cost/ change in quantity of output- equal to the slope of the total cost curve. Curve slopes upward because there are diminishing returns to inputs.
MC=Change in TC/Change in Q
MC=Change in TC/Change in Q
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Average Total Cost (Average cost) (ATC)
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total cost divided by quantity of output produced. On average, how much does each individual unit of output cost to produce. ATC is U shaped because AFC and AVC move in opposite directions as output rises
ATC= TC/Q
ATC= TC/Q
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U shaped average total cost curve
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ATC falls at low levels of output, then rises at higher levels
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Average fixed cost (AFC)
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fixed cost per unit of output
AFC= FC/Q
AFC= FC/Q
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Average variable cost (AVC)
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variable cost per unit of output
AVC= VC/Q
AVC= VC/Q
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Spreading effect
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the larger the output, the greater quantity of output over which fixed cost is spread, leading to a lower AFC
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Diminishing returns effect
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larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.
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Quantity at Minimum ATC...Minimum-cost output
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quantity of output at which average total cost is lowest- the bottom of the U shaped average total cost curve. At the minimum cost output: ATC=MC- only point at which ATC is neither rising or falling
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Long run average total cost curve
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shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output.
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Increasing returns to scale/economics of scale
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occurs when long-run average total cost declines as output increases
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Decreasing returns to scale/ diseconomies of scale
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when long run average total cost increases as output increases
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Constant returns to scale
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when long-run average total cost is constant as output increases
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Price taking producers
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producers whose actions have no effect on the market price of the good or service it sells. The market price is a given, and can't be changed whether the producer makes more or less
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Perfectly competitive market
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market in which all market participants are price takers.
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Market share
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the fraction of the total industry output accounted for by that producers output- how big of a player is an individual producer in a market.
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Perfect Substitute Goods--Standardized product/commodity
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consumers regard the products of different producers as the same good- same no matter who producers it i.e. potatoes, oil
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Free entry and exit
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when new producers can easily enter into an industry and existing producers can easily leave that industry
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Marginal revenue
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change in total revenue generated by an additional unit of output MR= ΔTR/ΔQ - in perfect competition it is always constant
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Profit Max Rule---Optimal output rule
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profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost. MR=MC
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Price-taking firm's optimal output rule
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a price taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced MR=D=AR= P
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Marginal revenue curve
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shows how marginal revenue varies as output varies- horizontal in perfect competition because it is perfectly elastic- can sell as much as they want at that price.
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Shutdown price
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the price at which a firm ceases production in the short run because the market price has fallen below the minimum average variable cost
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Short run market equilibrium
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an economic balance that results when the quantity supplied equals the quantity demanded, taking the number of producers as given
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Long run market equilibrium
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an economic balance in which given sufficient time for producers to enter and exit an industry, the quantity demanded equals the quantity supplied
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Market power
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the ability of a firm to impact (increase/decrease) prices
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Barrier to entry
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something that prevents other firms from entering the industry
-control of a scarce resource/input
-increasing returns to scale- gas lines- able to spread the fixed costs over a larger volume, lowered average total costs than smaller firms- ATC falls as output increases- increasing returns to scale- drives out competitors
-technological superiority
-government created barriers
-control of a scarce resource/input
-increasing returns to scale- gas lines- able to spread the fixed costs over a larger volume, lowered average total costs than smaller firms- ATC falls as output increases- increasing returns to scale- drives out competitors
-technological superiority
-government created barriers
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