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Production Function
answer
shows the maximum amount of output that can be produced from a given amount of inputs
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Short run vs. Long run
answer
Short: period of time in which at least one input is fixed (ex: capitol is fixed, labor variable)
Long: all inputs variable
Long: all inputs variable
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Marginal Product
answer
change in total product when the firm increases input by one unit
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Law of Diminishing Marginal Product
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as you add more and more of a variable input to a fixed input, at some point the marginal product of the variable input begins to decrease (congestion effect overtakes specialization effect)
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Short Run Costs of Production (7 in chart)
answer
fixed costs, variable costs, total cost, average fixed cost, average variable cost, average total cost, marginal cost (change in TC)
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MC= w/MPL
answer
Marginal Cost = wage rate/marginal product of labor
Meaning: Diminishing marginal product leads to increasing marginal cost
Meaning: Diminishing marginal product leads to increasing marginal cost
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Relationship between marginal and average
answer
If Marginal > Average, then Average will INCREASE
If Marginal < Average, then Average will DECREASE
(think like grades and new assignment)
If Marginal < Average, then Average will DECREASE
(think like grades and new assignment)
question
Assumptions for Perfect Competition
answer
1. many buyers and sellers, no 1 producer able to affect
2. firms produce identical products
3. complete information
4. easy entry and exit
5. no externalities
6. no transaction costs
7. no government interference
2. firms produce identical products
3. complete information
4. easy entry and exit
5. no externalities
6. no transaction costs
7. no government interference
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Necessary condition for Profit-Maximization
answer
MR=MC
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Marginal Cost
answer
change in total cost that occurs when a firm changes its output unit by one
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Long Run equilibrium in perfect competition
answer
P=MC=ATC
ATC is maximized!
ATC is maximized!
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Monopoly
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market with a single seller that sells a single product with no close substitutes
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Main Comparison in this section
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Monopoly vs. Perfect Competition
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Q^M
answer
monopoly quantity
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P^M
answer
monopoly price
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Q^C
answer
perfectly competitive quantity
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P^C
answer
perfectly competitive price
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Lerner Index
answer
1/|E| = (P-MC)/P
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Pareto Efficiency
answer
a situation where there is no way to make some economic agent better off without making some other economic agent worse off
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Price Discrimination
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occurs when a firm charges different prices to different consumers for the same product
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Necessary conditions for price discrimination
answer
1. Firm must face a downward-sloping demand curve
2. Firm must be able to identify diff groups of consumers with diff price elasticities of demand (more elastic = lower price)
3. Must be difficult for consumers to resell
2. Firm must be able to identify diff groups of consumers with diff price elasticities of demand (more elastic = lower price)
3. Must be difficult for consumers to resell
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1st degree price discrimination
answer
firm charges each consumer exactly what they are willing to pay
ex: car sales
ex: car sales
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2nd degree price discrimination
answer
firm charges diff customers depending on how much of the product they buy
ex: rewards card, phone plan per minutes
ex: rewards card, phone plan per minutes
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3rd degree price discrimination
answer
firm charges diff prices to diff groups of consumers
ex: student or senior discounts
ex: student or senior discounts
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Increasing Returns to Scale
answer
when output increases by a larger proportion than increase of inputs
"Economies of Scale"
Decreasing LRAC
"Economies of Scale"
Decreasing LRAC
question
Decreasing Returns to Scale
answer
when output increases less than the proportion of increase in inputs
"Diseconomies of Scale"
Increasing LRAC
"Diseconomies of Scale"
Increasing LRAC
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Minimum Efficient Scale (MES)
answer
smallest q where LRAC is minimized
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