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Long Run Costs
answer
- all inputs are variable
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The 3 Scales in Long Run Costs
answer
(1) Economies of Scale
(2) Diseconomies of Scale
(3) Constant Returns to Scale
(2) Diseconomies of Scale
(3) Constant Returns to Scale
question
Economies of Scale
answer
- average costs decline as output increase
- cause: specialization and division of labor
- example: Model T. Ford
- cause: specialization and division of labor
- example: Model T. Ford
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Diseconomies of Scale
answer
- average costs increase as output increases
- cause: problems of management and control
- cause: problems of management and control
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Constant Returns of Scales
answer
- average cost stays constant as output increases
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Revenue
answer
- REVENUE = P (Q)
- how is price established?: it depends on market (industry) structure
- how is price established?: it depends on market (industry) structure
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Market (Industry) Structure
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- individual firms: Uncle John's Apple Company
- industry: all the apple firms
- industry: all the apple firms
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GO OVER TABLE
answer
...
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Firms in a Perfectly Competitive Market
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- the firm's total economic profit is TOTAL REVENUE - TOTAL COSTS
- supply: TOTAL / UNIT COSTS
- demand: TOTAL / UNIT REVENUES
- total revenues is P(QS) demanded
- supply: TOTAL / UNIT COSTS
- demand: TOTAL / UNIT REVENUES
- total revenues is P(QS) demanded
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Industry vs. Firm
answer
- in perfect competition, price is determined by the industry
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Why is demand curve (price lingo) in perfect competition horizontal?
answer
- firm is a PRICE TAKER
- no control over price
- no control over price
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Average Revenue (AR)
answer
- TOTAL REVENUE / QUANTITY
- or ... (PRICE)(QUANTITY) / (QUANTITY)
- average revenue is the same thing as "price"
- or ... (PRICE)(QUANTITY) / (QUANTITY)
- average revenue is the same thing as "price"
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Marginal Revenue
answer
- the change in total revenue per unit change in output
- DELTA TR / DELTA Q
- or... (PRICE)(DELTA Q)/(DELTA Q)
- marginal revenue = price ONLY IN PERFECT COMPETITION
- DELTA TR / DELTA Q
- or... (PRICE)(DELTA Q)/(DELTA Q)
- marginal revenue = price ONLY IN PERFECT COMPETITION
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Graphs of AR and MR
answer
- the marginal revenue curve shows marginal revenue at each level of output.
- output is the independent variable
- MR is the dependent variable
- for a competitive firm, MR is constant
- the average revenue curve shows average revenue as a function of output.
- the average revenue is the demand curve for output as seen by the firm
- in the case of perfect competition, the average revenue is horizontal at the going market price
- IMPORTANT POINT: in perfect competition, MR and AR are ALWAYS equal and constant for a firm
- the sense of this is that a competitive firm can always sell additional units of output as the going market price
- output is the independent variable
- MR is the dependent variable
- for a competitive firm, MR is constant
- the average revenue curve shows average revenue as a function of output.
- the average revenue is the demand curve for output as seen by the firm
- in the case of perfect competition, the average revenue is horizontal at the going market price
- IMPORTANT POINT: in perfect competition, MR and AR are ALWAYS equal and constant for a firm
- the sense of this is that a competitive firm can always sell additional units of output as the going market price
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