CH8 Production - Assignment Essays

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Fixed Input

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An input whose quantity cannot be changed as output changes

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variable input

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An input whose quantity can be changed as output changes

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Marginal Physical Product (MPP)

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the change in output that results from changing the variable input by one unit, with all other inputs held fixed. MPP= ΔQ/ΔL

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Law of Diminishing Marginal Returns

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As ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline

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Fixed Costs

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Costs that do not vary with output; the costs associated with fixed inputs

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Variable costs

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Costs that vary with output; the costs associated with variable inputs

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Total Cost

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Sum of fixed and variable cost
TC=TFC+TVC

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Marginal Cost

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change in total cost that results from a change in output
MC= ΔTC/ΔQ

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Profit

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Profit = TR - TC

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Total Revenue

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TR = P x Q

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Explicit Cost

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A cost incurred when an actual (monetary) Payment is made

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Accounting Profit

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TR - TC (explicit cost)

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Economic Profit

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TR - TC (explicit + implicit costs)

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Average Fixed Cost (AFC)

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AFC = TFC / Q

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Average Variable Cost (AVC)

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AVC = TVC / Q

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Average Total Cost (ATC)

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ATC = TC / Q or ATC = AFC + AVC

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Average-marginal rule:

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When the marginal magnitude is above the average magnitude, the average magnitude rises; when the marginal magnitude is below the average magnitude, the average magnitude falls.
MC > AVC or ATC, Average rises
MC < AVC or ATC, Average falls
MC intersects AVC and ATC at minimum

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Sunk Cost

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A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered

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In the downward-sloping portion of the average variable cost curve, it is always true that the

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marginal cost curve is below the average variable cost curve

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Long-Run Average Total Cost (LRATC) Curve

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A curve that shows the lowest (unit) cost at which a firm can produce any given level of output. Long run has no fixed inputs

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MC, AVC or ATC

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The _____ curve cuts the _____ curve at its lowest point.

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Economies of Scale

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Economies that exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall

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Diseconomies of Scale

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The condition when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.

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Market Structure

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The environment whose characteristics influence a firm's pricing and output decisions

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Perfect Competition

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A theory of market structure based on four assumptions
1. Many buyers and many sellers
2. Each firm sells a homogeneous product
3. Buyers and sellers have all relevant information
4. Firms have easy entry and exit

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Price Taker

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A seller that does not have the ability to control the price of the product it sells; the seller "takes" the price determined in the market. The demand curve for a perfectly competitive firm is horizontal.

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Marginal Revenue in Perfect Markets (MR):

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The change in total revenue (TR) that results from selling one additional unit of output (Q).
MR = ΔTR / ΔQ

P = MR as well

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Profit Maximization Rule

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Profit is maximized by producing the quantity of output at which MR = MC

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Resource Allocative Efficiency

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The situation in which firms produce the quantity of output at which price equals marginal cost.
P = MC

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Continue to produce in short run

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Price is below average total cost but above average variable cost AVC < P < ATC

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Shutting down in the short run

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Price is below average variable cost P < AVC

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Long-Run Competitive Equilibrium

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P = MC = SRATC = LRATC
• Economic profit is zero: P = SRATC
• Firms are producing Q where P = MC
• No firm has an incentive to change its plant size: SRATC = LRATC

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Productive Efficiency

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The situation in which a firm produces its output at the lowest possible per-unit cost. (lowest ATC).

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Long-Run (Industry) Supply (LRS) Curve

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A graphic representation of the quantities of output that an industry is prepared to supply at different prices after the entry and exit of firms are completed.

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Constant-Cost Industry

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An industry in which ATC do not change as output increases or decreases when firms enter or exit the industry, respectively

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Increasing-Cost Industry

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An industry in which ATC increase as output increases and decrease as output decreases when firms enter and exit the industry, respectively.

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Decreasing-Cost Industry

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An industry in which ATC decrease as output increases and increase as output decreases when firms enter and exit the industry, respectively

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If market demand rises in a perfectly competitive market, it follows that

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a perfectly competitive firm's marginal revenue will rise

1 of 38

question

Fixed Input

answer

An input whose quantity cannot be changed as output changes

question

variable input

answer

An input whose quantity can be changed as output changes

question

Marginal Physical Product (MPP)

answer

the change in output that results from changing the variable input by one unit, with all other inputs held fixed. MPP= ΔQ/ΔL

question

Law of Diminishing Marginal Returns

answer

As ever larger amounts of a variable input are combined with fixed inputs, eventually the marginal physical product of the variable input will decline

question

Fixed Costs

answer

Costs that do not vary with output; the costs associated with fixed inputs

question

Variable costs

answer

Costs that vary with output; the costs associated with variable inputs

question

Total Cost

answer

Sum of fixed and variable cost
TC=TFC+TVC

question

Marginal Cost

answer

change in total cost that results from a change in output
MC= ΔTC/ΔQ

question

Profit

answer

Profit = TR - TC

question

Total Revenue

answer

TR = P x Q

question

Explicit Cost

answer

A cost incurred when an actual (monetary) Payment is made

question

Accounting Profit

answer

TR - TC (explicit cost)

question

Economic Profit

answer

TR - TC (explicit + implicit costs)

question

Average Fixed Cost (AFC)

answer

AFC = TFC / Q

question

Average Variable Cost (AVC)

answer

AVC = TVC / Q

question

Average Total Cost (ATC)

answer

ATC = TC / Q or ATC = AFC + AVC

question

Average-marginal rule:

answer

question

Sunk Cost

answer

A cost incurred in the past that cannot be changed by current decisions and therefore cannot be recovered

question

In the downward-sloping portion of the average variable cost curve, it is always true that the

answer

marginal cost curve is below the average variable cost curve

question

Long-Run Average Total Cost (LRATC) Curve

answer

A curve that shows the lowest (unit) cost at which a firm can produce any given level of output. Long run has no fixed inputs

question

MC, AVC or ATC

answer

The _____ curve cuts the _____ curve at its lowest point.

question

Economies of Scale

answer

Economies that exist when inputs are increased by some percentage and output increases by a greater percentage, causing unit costs to fall

question

Diseconomies of Scale

answer

The condition when inputs are increased by some percentage and output increases by a smaller percentage, causing unit costs to rise.

question

Market Structure

answer

The environment whose characteristics influence a firm's pricing and output decisions

question

Perfect Competition

answer

question

Price Taker

answer

question

Marginal Revenue in Perfect Markets (MR):

answer

The change in total revenue (TR) that results from selling one additional unit of output (Q).
MR = ΔTR / ΔQ

P = MR as well

question

Profit Maximization Rule

answer

Profit is maximized by producing the quantity of output at which MR = MC

question

Resource Allocative Efficiency

answer

The situation in which firms produce the quantity of output at which price equals marginal cost.
P = MC

question

Continue to produce in short run

answer

Price is below average total cost but above average variable cost AVC < P < ATC

question

Shutting down in the short run

answer

Price is below average variable cost P < AVC

question

Long-Run Competitive Equilibrium

answer

P = MC = SRATC = LRATC
• Economic profit is zero: P = SRATC
• Firms are producing Q where P = MC
• No firm has an incentive to change its plant size: SRATC = LRATC

question

Productive Efficiency

answer

The situation in which a firm produces its output at the lowest possible per-unit cost. (lowest ATC).

question

Long-Run (Industry) Supply (LRS) Curve

answer

A graphic representation of the quantities of output that an industry is prepared to supply at different prices after the entry and exit of firms are completed.

question

Constant-Cost Industry

answer

An industry in which ATC do not change as output increases or decreases when firms enter or exit the industry, respectively

question

Increasing-Cost Industry

answer

An industry in which ATC increase as output increases and decrease as output decreases when firms enter and exit the industry, respectively.

question

Decreasing-Cost Industry

answer

An industry in which ATC decrease as output increases and increase as output decreases when firms enter and exit the industry, respectively

question

If market demand rises in a perfectly competitive market, it follows that

answer

a perfectly competitive firm's marginal revenue will rise

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