question
What is the equation for total cost?
answer
Total (opportunity) cost = explicit + implicit
question
Explicit cost
answer
costs that require a money outlay
question
Implicit costs
answer
costs that don't require a money outlay
question
How to find total profit
answer
Total profit = total revenue - total cost
question
How to find economic profit
answer
Economic profit = total revenue - (explicit + implicit costs)
question
How to find accounting profit
answer
Accounting profit = total revenue - explicit cost
question
Which profit tends to be higher?
answer
Accounting profit tends to be more higher then economic profit
question
Production function
answer
A graph showing the relationship between the quantity of an input and the quantity of the output of the good, while holding other inputs constant and also gets flatter with additional input
question
Marginal production
answer
The increase in output from an additional unit of an input and also diminishes as the quantity of the input increases
question
What is the slope of a production function graph?
answer
Marginal production = (change of quantity of good)/(change of labor)
question
Short run
answer
The time frame in which some inputs are fixed
- assume capital is fixed
- the firm can only adjust the quantity of the good produced by increasing or decreasing labor
- assume capital is fixed
- the firm can only adjust the quantity of the good produced by increasing or decreasing labor
question
Total cost
answer
The sum of all costs incurred by a firm un producing a certain level of output
- TC = FC + VC
- TC = FC + VC
question
Marginal cost
answer
The increase in total cost due to an additional unit produced
- MC = (Change in TC)/(Change in Q)
- MC = (Change in TC)/(Change in Q)
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Variable cost
answer
Costs that vary with the quantity of output produced such as cost of equipment, loan payments, rent
- VC
- VC
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Fixed cost
answer
Costs that don't vary with quantity of output produced such as cost of equipment and rent
- FC
- FC
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Average fixed cost
answer
AFC = FC/Q
question
Average variable cost
answer
AVC = VC/Q
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Average total cost
answer
ATC = TC/Q or AFC + AVC
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Long term cost
answer
The time frame in which all inputs are variable
- capital and all other inputs can vary with output
- capital and all other inputs can vary with output
question
Long-run ATC (LRATC)
answer
Shows the lowest ATC possible at each Q when the firm has the time to change labor and capital
question
Scales of production
answer
Includes economies of scale, constant return of sale, and diseconomies of scale
question
Economies of scale
answer
ATC falls as Q increase
question
Constant return of scale
answer
ATC remains constant as Q increases
question
Diseconomies of scale
answer
ATC rises as Q rises
question
What are the conditioned of a perfect competition?
answer
- there are many buyers and sellers of the good
- all firms sell the same (quality) good
- there are no barriers to enter (or exiting) the market
- there is equal information across firms
- all firms sell the same (quality) good
- there are no barriers to enter (or exiting) the market
- there is equal information across firms
question
Firms in a perfectly competitive market
answer
the firms (and buyers) in a perfectly competitive market are "price takers"
- the individual firm can't influence the price of good it produces
- firms in this type of market face a perfectly elastic demand
- the individual firm can't influence the price of good it produces
- firms in this type of market face a perfectly elastic demand
question
Short run decisions in profit-maximization
answer
- must decide whether to produce or shutdown temporarily and if producing
- the firm must determine the profit-maximizing Q
- the firm must determine the profit-maximizing Q
question
Long run decisions in profit-maximization
answer
- whether to increase or decrease plant size (variable in long run)
- whether to enter or exit the industry
- whether to enter or exit the industry
question
Profit maximizing rule
answer
- produce Q where MR = MC
- if MR > MC, the firm should increase its output
- if MR < MC, the firm should decrease its output
- if MR > MC, the firm should increase its output
- if MR < MC, the firm should decrease its output
question
Short-run supply shutdown decision
answer
a temporary choice to not produce in the short run
- firms must still pay fixed cost (sunk cost) in the short run
- firm can d=save on variable cost
- will shut down if: TR < VC
- shutdown point: P = minimum AVC
- firms must still pay fixed cost (sunk cost) in the short run
- firm can d=save on variable cost
- will shut down if: TR < VC
- shutdown point: P = minimum AVC
question
Short run calculations
answer
- if produce (Q>0), then P = AR > AVC
- if shutdown (Q<0), then AR < AVC
- to calculate profit: profit = (P-ATC) x Q
- this means TR>TC and P>ATC
- to calculate loss: Loss = (P-ATC) x Q < 0
- to calculate zero economic cost: 0 = (P-ATC) x Q
- this means TR = TC and P = ATC
- if shutdown (Q<0), then AR < AVC
- to calculate profit: profit = (P-ATC) x Q
- this means TR>TC and P>ATC
- to calculate loss: Loss = (P-ATC) x Q < 0
- to calculate zero economic cost: 0 = (P-ATC) x Q
- this means TR = TC and P = ATC
question
If market conditions remain profitable in the firm's long run, then
answer
- profits will attract new firms into the market
- market supply shifts right and equilibrium price falls
- adjustments continue until all profits are squeezed out of the market
- market supply shifts right and equilibrium price falls
- adjustments continue until all profits are squeezed out of the market
question
If market conditions remain unprofitable in the firm's long run, then
answer
- existing firms will exit the market
- market supply shifts left and equilibrium price rises
- adjustments continue until all losses are eliminated
- market supply shifts left and equilibrium price rises
- adjustments continue until all losses are eliminated
question
Zero economic profit in firm's long run supply
answer
- occurs when P = min ATC
- all economic costs of producing are covered including the opportunity cost of owner's time
- all economic costs of producing are covered including the opportunity cost of owner's time
question
Long run equilibrium
answer
- no incentive for new firms to enter
- no reason for existing, firms begin to leave
- no reason for existing, firms begin to leave
question
Long run equilibrium = efficient outcome
answer
- buyers are paying the lowest possible price while still providing the firm enough incentive to produce
- firms are producing at their efficient scale (min ATC)
- creates incentives for firms to search for cost saving techniques
- firms are producing at their efficient scale (min ATC)
- creates incentives for firms to search for cost saving techniques
question
How can a market be taken out of long run equilibrium?
answer
- if firms discover cost saving technology
- if market demand changes
- market adjustments will reoccur until the market as returned to a long run equilibrium
- if market demand changes
- market adjustments will reoccur until the market as returned to a long run equilibrium
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