Chapter 10-11 Principle of Economics

question

Short Run

answer

is a time frame in which the quantity of at least one factor of production is fixed.

question

Long Run

answer

is a time frame in which the quantities of all factors of production can be varied.

question

the relationship between output and the quantity of labor

answer

Total product
Marginal product
Average product

question

Marginal Product

answer

is the increase in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same.

question

Average Product

answer

tells how productive workers are on average
total product divided by the quantity of labor employed.

question

every production process has two features:

answer

Increasing marginal returns initially
Diminishing marginal returns eventually

question

Diminishing marginal returns

answer

occur when the marginal product of an additional worker is less than the marginal product of the previous worker.

question

Increasing marginal returns

answer

when the marginal product of an additional worker exceeds the marginal product of the previous worker

question

law of diminishing returns

answer

states that
As a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.

question

ATC Curve

answer

Each short-run ATC curve is U-shaped.
For each short-run ATC curve, the larger the plant, the greater is the output at which average total cost is at a minimum.

question

long-run average cost curve

answer

is the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs.

question

Economies of scale

answer

are features of a firm's technology that make average total cost fall as output increases.

question

Diseconomies of scale

answer

are features of a firm's technology that make average total cost rise as output increases.

question

Constant returns to scale

answer

are features of a firm's technology that keep average total cost constant as output increases

question

minimum efficient scale

answer

is the smallest output at which long-run average cost reaches its lowest level.

question

A firm's opportunity cost of production is the sum of the cost of using resource

answer

Bought in the market
Owned by the firm
Supplied by the firm's owner

question

Economic depreciation

answer

is the fall in the market value of a firm's capital over a given period. It equals the market price of the capital at the beginning of the period minus the market price of the capital at the end of the period.

question

normal profit

answer

the profit that an entrepreneur earns on average

question

To achieve the objective of maximum economic profit, a firm must make five decisions

answer

What to produce and in what quantities
How to produce
How to organize and compensate its managers and workers
How to market and price its products
What to produce itself and buy from others

question

Three features of a firm's environment limit the maximum economic profit it can make

answer

Technology constraints
Information constraints
Market constraints

question

Technological efficiency

answer

occurs when the firm produces a given output by using the least amount of inputs

question

Economic efficiency

answer

occurs when the firm produces a given output at the least cost.

question

Each firm organizes the production of goods and services using a combination of two systems

answer

Command systems
Incentive systems

question

command system

answer

is a method of organizing production that uses a managerial hierarchy

question

incentive system

answer

is a method of organizing production that uses a market-like mechanism inside the firm

question

principal-agent problem

answer

is the problem of devising compensation rules that induce an agent to act in the best interest of a principal

question

Three ways of coping with the principal-agent problem

answer

Ownership
Incentive pay
Long-term contracts

question

three main types of business organization

answer

Proprietorship
Partnership
Corporation

question

Economists identify four market types

answer

Perfect competition
Monopolistic competition
Oligopoly
Monopoly

question

Perfect competition

answer

arises when there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry

question

Monopolistic competition

answer

is a market structure in which a large number of firms compete by making similar but slightly different products.

question

product differentiation

answer

Making a product slightly different from the product of a competing firm

question

Oligopoly

answer

is a market structure in which a small number of firms compete.

question

Monopoly

answer

arises when there is one firm, which produces a good or service that has no close substitutes and in which the firm is protected by a barrier preventing the entry of new firms

question

Economists use two measures of concentration

answer

The four-firm concentration ratio
The Herfindahl-Hirschman Index

question

four-firm concentration ratio

answer

is the percentage of the value of sales accounted for by the four largest firms in an industry.

question

Herfindahl-Hirschman Index

answer

also called the HHI—is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market

question

The three main limitations of using only concentration measures

answer

The geographical scope of the market
Barriers to entry and firm turnover
The correspondence between a market and an industry

question

Firms are often more efficient than markets as coordinators of economic activity because they can achieve

answer

Lower transactions costs
Economies of scale
Economies of scope
Economies of team production

question

Transactions costs

answer

are the costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled.

question

economies of scale

answer

When the cost of producing a unit of a good falls as its output rate increases

question

economies of scope

answer

when it uses specialized (and often expensive) resources to produce a range of goods and services

question

total Product

answer

The maximum output that a given quantity of labor can produce

1 of 43

question

Short Run

answer

is a time frame in which the quantity of at least one factor of production is fixed.

question

Long Run

answer

is a time frame in which the quantities of all factors of production can be varied.

question

the relationship between output and the quantity of labor

answer

Total product
Marginal product
Average product

question

Marginal Product

answer

is the increase in total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same.

question

Average Product

answer

tells how productive workers are on average
total product divided by the quantity of labor employed.

question

every production process has two features:

answer

Increasing marginal returns initially
Diminishing marginal returns eventually

question

Diminishing marginal returns

answer

occur when the marginal product of an additional worker is less than the marginal product of the previous worker.

question

Increasing marginal returns

answer

when the marginal product of an additional worker exceeds the marginal product of the previous worker

question

law of diminishing returns

answer

states that
As a firm uses more of a variable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes.

question

ATC Curve

answer

Each short-run ATC curve is U-shaped.
For each short-run ATC curve, the larger the plant, the greater is the output at which average total cost is at a minimum.

question

long-run average cost curve

answer

is the relationship between the lowest attainable average total cost and output when the firm can change both the plant it uses and the quantity of labor it employs.

question

Economies of scale

answer

are features of a firm's technology that make average total cost fall as output increases.

question

Diseconomies of scale

answer

are features of a firm's technology that make average total cost rise as output increases.

question

Constant returns to scale

answer

are features of a firm's technology that keep average total cost constant as output increases

question

minimum efficient scale

answer

is the smallest output at which long-run average cost reaches its lowest level.

question

A firm's opportunity cost of production is the sum of the cost of using resource

answer

Bought in the market
Owned by the firm
Supplied by the firm's owner

question

Economic depreciation

answer

question

normal profit

answer

the profit that an entrepreneur earns on average

question

To achieve the objective of maximum economic profit, a firm must make five decisions

answer

What to produce and in what quantities
How to produce
How to organize and compensate its managers and workers
How to market and price its products
What to produce itself and buy from others

question

Three features of a firm's environment limit the maximum economic profit it can make

answer

Technology constraints
Information constraints
Market constraints

question

Technological efficiency

answer

occurs when the firm produces a given output by using the least amount of inputs

question

Economic efficiency

answer

occurs when the firm produces a given output at the least cost.

question

Each firm organizes the production of goods and services using a combination of two systems

answer

Command systems
Incentive systems

question

command system

answer

is a method of organizing production that uses a managerial hierarchy

question

incentive system

answer

is a method of organizing production that uses a market-like mechanism inside the firm

question

principal-agent problem

answer

is the problem of devising compensation rules that induce an agent to act in the best interest of a principal

question

Three ways of coping with the principal-agent problem

answer

Ownership
Incentive pay
Long-term contracts

question

three main types of business organization

answer

Proprietorship
Partnership
Corporation

question

Economists identify four market types

answer

Perfect competition
Monopolistic competition
Oligopoly
Monopoly

question

Perfect competition

answer

arises when there are many firms, each selling an identical product, many buyers, and no restrictions on the entry of new firms into the industry

question

Monopolistic competition

answer

is a market structure in which a large number of firms compete by making similar but slightly different products.

question

product differentiation

answer

Making a product slightly different from the product of a competing firm

question

Oligopoly

answer

is a market structure in which a small number of firms compete.

question

Monopoly

answer

arises when there is one firm, which produces a good or service that has no close substitutes and in which the firm is protected by a barrier preventing the entry of new firms

question

Economists use two measures of concentration

answer

The four-firm concentration ratio
The Herfindahl-Hirschman Index

question

four-firm concentration ratio

answer

is the percentage of the value of sales accounted for by the four largest firms in an industry.

question

Herfindahl-Hirschman Index

answer

also called the HHI—is the square of the percentage market share of each firm summed over the largest 50 firms (or summed over all the firms if there are fewer than 50) in a market

question

The three main limitations of using only concentration measures

answer

The geographical scope of the market
Barriers to entry and firm turnover
The correspondence between a market and an industry

question

Firms are often more efficient than markets as coordinators of economic activity because they can achieve

answer

Lower transactions costs
Economies of scale
Economies of scope
Economies of team production

question

Transactions costs

answer

question

economies of scale

answer

When the cost of producing a unit of a good falls as its output rate increases

question

economies of scope

answer

when it uses specialized (and often expensive) resources to produce a range of goods and services

question

total Product

answer

The maximum output that a given quantity of labor can produce

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