Chapter: 7 Principles of Microeconomics 2e

It's abillity to take advantage of economies of scale, thereby providing more units of a (G/S) at a cheaper price

An organization that combines inputs to produce outputs

The outputs they produce must be more valuable than the inputs they are made of

business ownership by private people

The process of creating (G/S), by combining inputs

1) What (G/S) to produce
2) How much of a (G/S) to produce
3) What price to charge

1) Perfect Competition: Many firms selling same (G/S)
2) Monopolistic Competition: Many firms selling same, but not identical (G/S)
3) Oligopoly: A few firms selling same, or identical (G/S)
4) Monopoly: 1 firm selling (G/S) w/ no competition

To earn a profit

total revenue - total cost

Income generated from selling (G/S)

Price x Quantity sold

Consumer demand for (G/S)

How much it cost a firm to (Produce & Sell) a (G/S), or explicit + implicit cost = total cost

1) The total amount of inputs needed to produce (G/S), including labor, raw materials, physical capital, etc.
2) Cost of inputs

Out of pocket direct payments, eg. rent, wages

The opp. cost of using resources firms already owns, eg. owners working & not being paid, or depreciation of goods, material, equip. etc already owned by firm

1) Accounting Profit: $ brought in - $ paid out, or total revenue - explicit cost
2) Economic Profit: Includes (Explicit & Implicit) cost, or total revenue- total cost

B/c income tax is paid on acct. profit, while success of firm is based on econ. profit

1) Natural Resources, eg. land, raw materials
2) Labor
3) Physical Capital, eg. machines, equip., buildings, etc
4) Entrepreneurship, eg. person who starts & makes all decisions on how biz is run

Equation that shows max. outputs that can be produced w/ given amount of inputs, aka shows a relationship b/t inputs & outputs

1) Fixed Inputs: Factors that can't be easily increased or decreased in short amount of time, eg. office rent
2) Variable Inputs: Factors that can be easily increased or decreased in short amount of time, eg. price of inputs, including labor, raw materials, etc.

1) Short Run Production: A period of time where at least some factors are (Fixed), eg. rent on office space
2) Long Run Production: A period of time where at least some factors are (Variable), eg. price of inputs

Additional output of 1 more worker

It increases production, but if you continue (MP) starts to diminish

The rule that hiring additional help for a specific job at some point will result in diminishing (MP)

A factor payment, or cost involved in producing (G/S), eg. price of inputs, rent, wages, interest & dividends, & profit, which is paid to entrepreneur after all other cost are paid

1) Fixed cost: Cost of inputs that don't change in short run, or due to level of production, eg. physical capital, rent, equip, etc.
2) Variable Cost: Cost of inputs that vary, eg. labor, price of inputs

Fixed cost would stay the same, but as production increases variable cost are added to fixed cost

By increasing or decreasing variable cost, eg. if you want to produce more goods increase labor

the sum of fixed and variable costs

total cost divided by the quantity of output produced, usually results in U-shaped curve

the additional cost of producing one more unit of output, usually upward sloping

variable cost divided by the quantity of output produced

Below (ATC), U-shaped, or upward sloping

Whatever the firms quan. of production is, total revenue must be more than total cost

Sunk cost, or cost already spent that you can't get back

It allows for some flexibility if needed, variable cost can be cut fixed cost can't be cut

profit divided by the quantity of output produced

If firm can make a profit given current price in market

1) If market price is greater than (AC), avg. profits will be pos.
2) If market price is less than (AC), avg. profits will be neg.

They are all variable, including capital

Different ways of combining inputs to produce output, it helps plan for the long run

If firms don't find ways to produce (G/S) more efficiently, they may loose sales to those who do

They take advantage of (Econ. of Scales), which is larger scale of production leads to lower avg. cost per unit

1) Shows lowest possible avg. cost of production
2) Allows all inputs to production to vary

B/c all factors are variable, it shows most efficient way to produce at any level

Curve that shows lowest avg. cost to produce a certain amount of (G/S), when fixed cost vary, lies at bottom of (SRAC) curves

Shows total of avg. fixed cost & the avg. variable cost

When increasing all inputs proportionately doesn't change avg. cost of production

The (LRAC) of producing each unit increases as total output increases

It can b/c difficult to manage, which leads to inefficiencies

1) How many firms will compete in an industry
2) Does firms have many different sizes, or are all the same size

Any firm producing more or less than at minimum point will have higher cost, firms producing at minimum point produce at (Lower Avg. Cost)