3. Chapter 13 Flashcards
What is industrial organization?
The study of how firms’ decisions regarding prices and quantities depend on the market conditions they face
What is the total revenue for a firm?
What is the total cost?
The total revenue is the amount a firm receives for the sale of its output
The amount the firm receives for the sale of its output (cookies)
The total cost is the market value of the inputs a firm uses in production
The amount a firm pays to buy inputs (flour sugar etc for cookies)
What does profit equal?
Total revenue-total cost
What are explicit costs compared to implicit cost?
Explicit- input costs that require an outlay of money by the firm
Opportunity costs on employee wages
Implicit- input costs that do not require an outlay of money by the firm
Owner of cookie factory working as programmer for free when could be making 100 an hour
What is economic profit?
What is accounting profit?
Economics profit- total revenue minus total cost, including both implicit and explicit costs
Accounting profit- total revenue minus total explicit cost
Figure 13.1 on page 259
Accountant doesn’t include implicit costs because money didn’t come from the firm to pay for it
What is the production function?
The relationship between the quantity of inputs (employees) used to make a good and the quantity of output of that good
Diagram on page 261
What is the marginal product?
What is diminishing marginal product?
The increase in output that arises from an additional unit of input (employee)
Table 13.1 marginal product of labour on page 260
Diminishing is the property whereby the marginal product of an input declines as the quantity of the input increases
As you add an employee for work, the increased number of cookies made slightly decreases
What are fixed costs and variable costs?
Fixed costs- costs that do not vary with the quantity of output produced (rent paid or wage for a bookkeeper)
Variable costs- costs that do vary with the quantity of output produced (cost of coffee beans, milk, sugar, and paper cups, more coffee produced, more spent on these things)
What is the average total cost, the average fixed cost, and the average variable cost?
Average total cost- total cost divided by the quantity of output
ATC= TC/Q
Average fixed cost- fixed costs divided by the quantity of output
AFC=FC/Q
Average variable cost- variable costs divided by the quintet of output
AVC=VC/Q
Graph on page 266
What is marginal cost?
The increase in total cost that arises from an extra unit of production
Subtract the total cost for 2 coffee cups minus the total cost of 1 coffee cup to give the marginal cost
MC=ΔTC/ΔQ
Graph on page 266
Why is the average total cost U shaped on a graph?
It is the sum of the AFC and AVC and the AFC always declines as output rises since the fixed cost is spread over a larger number of units
AVC typically rises as output increases because of finishing marginal product
Graph of page 266
What is the efficient scale?
The quantity of output that minimizes total average cost
The bottom of the U shape curve for average total cost
What happens when marginal cost is less than average total cost? What about vice versa?
Whenever marginal cost is less that average total cost, average total cost is falling
Whenever marginal cost is greater than average total cost, average total cost is rising
THE MARGINAL COST CURVE CROSSES RHE AVERAGE TOTAL COST CURVE AT ITS MINIMUM
What are the three properties that are most important to remember about cost curves?
- Marginal cost eventually rises with the quantity of output
- The average total cost curve is u shaped
- The marginal cost curve crosses the average total cost curve at the minimum average total cost
What is economies and diseconomies of sale?
Economies of sale- long run average total cost falls as the quantity of the output increases
Diseconomies of sale- long run average total cost rises as the quantity of output increases
Graph on page 269
