Microeconomics: Part 2

The production function represents the maximum amount of output that can be produced with different combinations of inputs. (As the variable input is increased, more intuit is produced. This is measured by marginal physical product (MPP))

Given a fixed input (using capital), adding a variable input (usually labor) will increase total product but at a diminishing rate. (As returns diminish and MPP declines marginal cost (MC) increases.

- TC= FC+ VC
- Average costs are calculated by dividing each (TC, FC, VC) by quantity produced
-Marginal costs intersects ATC as its minimum point.

Economic costs include the value of al resources used (they = the sum of explicit costs and implicit costs), while Accounting costs include only those dollar costs actually paid. (They = explicit costs only).

True

True: "Bigger isn't always better"

The production function implies that it costs something to produce a good- no matter what the good is. The two types of production are:
1. Factors of Production
2. Production Function

Resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship.

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs

1. How is the best to produce
2. What is the smallest amount of output attainable from a given quantity of resources?
3. What is the maximum amount of output attainable from a given quantity of resources?

True

The productivity of any factor of production depends on the amount of other resources available to in. In other words the output is affected by the various inputs.

output per unit of input (e.g. output per labor-hour)

maximum output of a good from the resources used in production

False: The production function represents the MAXIMUM technical efficiency- that is, the most output attainable from any given level of factor inputs

the most desired goods or services that are foregone in order to obtain something else

The period in which the quantity and quantity of some inputs cants be changed

In the short-run, labor can changes while capital. is held constant in the short-run. As the amount of labor used increases in general, the output will also increase.

The change in total output associated with one additional unit of input. MPP= change in total output/ change in input quantity

True

The marginal physical product of a variable input decline as more of it is employed with a given quantity of other (fixed) inputs.

True

True

the difference between total revenue and total cost (there is no reason to expect maximum. profit to coincide with maximum output)

True

The increase in total cost associated with a one-unit increase in production. MC= change in Toal cost/change in output

False: Whenever MPP is increasing, the marginal cost of producing a good must be falling. If MPP decline, marginal cost will then increase.

Dollar costs are the most likely basis of production decisions. The dollar costs are directly related to the underlying production function.

The market value of all resources used to produce a good or service. TC= FC+VC

cost of production that don't change when the rate of output is altered (e.g. the cost of basic plant and equipment) (There is no way to avoid fixed costs in the short-run)

costs of production that change when the rate of output is altered (e.g. labor and material costs) (How fast total costs rise depends on variable costs ONLY)

True

Total cost/ total output = AFC+AVC

Total fixed costs/ Total output

Total variable cost/ Total output

Falling Average Fixed Cost (AFC)

Rising Average Variable COST (AVC)

True

The bottom of the "U", which represents the lowest possible opportunity costs to produce the product.

True

True

Te output decision has to be based not only on the capacity to production (the production function), but also on the costs of production ( the cost functions).

The marginal cost curve ALWAYS intersects the ATC and AVC curves at their lowest points.
-If MC > ATC, ATC is increasing
-If MC < ATC, ATC is decreasing
-If MC > AVC, AVC is increasing
- If MC < AVC, AVC is decreasing

How many resources are used in production

a payment made for the use of a resource

the value of resources used, for which no direct payment is made

the value of all resources used to produce a good or service (opportunity cost)

Explicit costs + Implicit costs

True

How economic and accounting costs will diverge. Whenever any factor of production is not paid an explicit wage.

True: In the long-run, new sites can be leased, new equipment can be installed, and new buildings can be constructed.

True: These costs (factory, equipment, etc. ) cannot be changed in the short run.

a period of time ling enough for all inputs to be varies (no fixed costs )

is also known as the long-run cost curve (LATC) that summarizes our best short-run cost possibilities, using existing technology and facilities.

also known as the long-run marginal cost curve (LMC) which intersects our long-run cost curve at its lowest point.

reductions in minimum average costs that come about through increase in the size (scale) of plant and equipment.

increases in plant size do not affect minimum average cost:minimum per-unit costs are identical for small plants ad large plants

True

a. flour

maximum output of a good attainable from different combinations of factor inputs.

Short-run

True

Fixed costs

Economic profit= TR-TC (* this includes both explicit and implicit costs)

- Many firms compete for consumer purchases.
- The products of each firm are identical
-Low entry barrier make it easy to get into the business.
- No firm has any market power; thus firms cannot manipulate the price. (price takers)
- Each firm's output is small relative to the total market amount.
- Each firm confronts a horizontal demand curve.

A competitive firms maximizes its profit when, P=MR=MC

A business will shut down when...
- A loss occurs (if price falls below ATC.)
- If revenues at least cover variable costs, the firm's operating loss is less than its fixed costs.
* A firm should not shut down until price falls below AVC

Production decision- in the short run, when a firm determines how must to produce (the profit maximizing output)
Investment decision- in the long run, when a firm must commit to incur fixed costs and to enter or exit an industry.

- When a firm's supply curve is above the shutdown point at minimum AVC
- When the determinants of supply include the price of inputs (technology, taxes, and expectations)
-When there is an increase in cost the supply curve shifts to the left-decrease in cost causes supply curve to shift to the right
- Taxes(Property taxes raise fixed costs; payroll taxes raise variable costs; profit taxes diminish after tax profits.)

the basic incentive for producing goods and services is the expectation of profit

True

True

False: Economic profit accounts for the opportunity costs of ALL resources

the opportunity cost of capital; zero economic profit.

the inducement to take on the added responsibilities of owning and operating a business( is the potential for economic profit)

the potential for profit is not a guarantee of profit. Profit represents compensation to owners for the risks incurred in owning ir operating a business.

True:

a firm that produces the entire market supply of a particular good or service

the number and relative size of firms in an industry

a market in which no buyer or seller has market power

1. Many firms-lots of businesses are competing for consumers purchases
2. Identical products- the products of the different firms are identical or nearly so.
3. Low entry barriers- it is relatively easy to get into the business.

the ability to alter the market price of a good or service

True

True

True

The selection of the short-run rate of output (with existing plant and equipment)

price*quantity sold in a given time period

False: The goal of a firm is to maximize profit, not revenue

the period in which the quantity (and quality) of some inputs can't be changes

costs of production that don't change when the rate of output is altered (are incurred even if no output is produced)

costs of production that change when the rate of output is altered

True: This reflects the law of diminishing returns

the increase in total costs associated with a one-unit in crease in production

Total revenue- total cost

where marginal revenue= price

the change in total revenue that results from a one-unit increase in the quantity sold. (MR= change in TR/ change in Output)

True

True: Profits are maximized at the rate of output here price =marginal cost

produce at the rate of output where marginal revenue = marginal cost

Increase output

Maintain output, when price=marginal cost the profits are maximized.

Decrease output

Total revenue -Total costs
profit per unit qty. =(P-ATC) Q

True:

Where price exceeds average variable cost but not average total cost, the profit maximization rule minimizes losses.

that rate of output where price equal minimum AVC

1. Where P> ATC, results in profit
2. Where ATC>P>AVC, results in loss
3. Where AVC> P, results in shutdown

the decision to build, buy, or lease plant and equipment; to enter or exit an industry (known as a long-run decision)

a period of time long enough for all inputs to be varied (no fixed costs)

- the price of factor inputs
- technology ( the available production function)
- expectations (for costs, sales, technology)
- Taxes and subsidies

Marginal cost curve

a curve describing the quantities of a good producer is willing and able to sell (produce) at alternative prices in a given time period.

True:
- as production costs increase, supply decreases and the supply curve shifts upward (leftward). The profit maximizing output will decrease.
- as production costs decrease, supply increases and the supply curve shifts downward (rightward). The profit maximizing output will increase