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firm
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an organization that brings together resources to produce a good or service and is under the control of a single management.
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In the short-run
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the size of a firm's capital stock is fixed. They are unable to change it. ,
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In the long-run
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all input levels can be changed
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Total Physical Product
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the maximum output that can be produced when variable resources are added to a fixed amount of capital.
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Marginal Physical Product
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...
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Average Physical Product
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Average product, APP, equals the total output divided by the quantity of the variable input.
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law of diminishing returns
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if more of one resource is employed while all other resources are held constant, eventually the marginal product of that one resource must fall.
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when MPP > APP
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APP is increasing
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when MPP < APP
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APP is decreasing
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This same relationship between marginal and average will hold for
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marginal and average costs
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Firms face two types of costs in the short-run:
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fixed costs: those costs that do not change as output increases and are incurred even if no output is produced at all, e.g. rent, interest, depreciation, fire insurance
variable costs: those costs that do increase as output increases
variable costs: those costs that do increase as output increases
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Total Costs (TC)
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Total Fixed Costs (TFC) + Total Variable Costs (TVC)
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Average Total Cost (ATC)
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TC/Q
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Average Fixed Cost (AFC)
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TFC/Q
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Average Variable Cost (AVC)
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TVC/Q
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Marginal Cost (MC
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the change in total cost when the firm increases output by one unit
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Marginal cost is equal to
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the change in total cost divided by the change in output
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In the long tun the levels of all resources are
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variable
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The long-run average cost curve consists of
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lower segments of the short-run average cost curves:
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economies of scale
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average costs fall as output increases
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diseconomies of scale
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average costs increase as output increases
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constant returns to scale
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costant average costs as output increases
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minimum efficient scale
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least cost level of production; it is the lowest point on the long-run average cost curve
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Economic Profit
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Accounting profit - opportunity costs of capital
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nput costs
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(its payments to suppliers of factors of production and intermediate goods)
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firm's opportunity cost of capital
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The foregone return on the entrepreneur's funds that could have been used in another business is
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can a buisness have an accounting profit with zero economic profits
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yes
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normal profit
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the firm earned as much in this line of business as it could have earned in some other line of business
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negative economic profits
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A firm can earn a positive accounting profit but negative economic profits if it could have earned a greater return in some other line of business
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Positive economic profits other name
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above normal profits
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above normal profits
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result when the business earned a greater return in this line of business than it could have earned elsewhere.
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zero economic profit means
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the owners could not use their time or money better in any other business
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Zero economic profit is a
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normal profit
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The accounting profits in this business are equal to
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the level of profit that the owners could get in their next best alternative
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A positive economic profit is an above ___ and
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s an above normal profit and attracts new firms into the industry
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Firms exit an industry in which they
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earn a negative economic profit
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Economists assume that the goal of firms is to
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maximize profit
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economic profits are equal to
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total revenue minus total costs including the opportunity cost of the owner's time and money
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With perfectly elastic demand the firm
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has no control over price. It only chooses the quantity to produce.
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A firm facing a downward sloping demand curve chooses
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both the price and quantity produced so as to maximize profits.
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Facing a perfectly inelastic demand curve, the firm only chooses
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the price sincethe quantity is determined by how much consumers want.
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Firms can reduce elasticity by
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reducing the availability of substitutes
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Differentiation can occur through
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advertising, price, service, quality, location, et cetera.
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Barriers to Entry depends on
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demand for its product but also on the ease of entry into the market.demand for its product but also on the ease of entry into the market.
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A barrier to entry is
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anything that makes it difficult or costly for a firm to enter a market.
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government barriers to entry and natural barriers to entry
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Some barriers to entry are created by the government: patents and copyrights, zoning, and licensing are examples. Other barriers to entry are economic in nature. One such barrier to entry are capital cost
economies of scale: ew firms will be forced to enter the market as large firms or else face a huge cost disadvantage. Expected retaliation and access to distribution channels can also act as barriers to entry.
economies of scale: ew firms will be forced to enter the market as large firms or else face a huge cost disadvantage. Expected retaliation and access to distribution channels can also act as barriers to entry.
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sunk cost
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a cost that has already been committed and cannot be recovered
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