Ch. 6: Sellers and Incentives

Question 1

Firm

Answer 1

A business entity that produces and sells goods or services

Question 2

Production

Answer 2

The process by which the transformation of inputs (such as labor and machines) to outputs (such as goods and services) occurs.

Question 3

Physical Capital

Answer 3

Any good, including machines and buildings, used for production.

Question 4

Short Run

Answer 4

A period of time when only some of a firm’s inputs can be varied
Fixed costs

Question 5

Long Run

Answer 5

A period of time wherein a firm can change any input

Variable costs

Question 6

Fixed Factor of Production

Answer 6

An input that cannot change in the short run

Question 7

Variable Factor of Production

Answer 7

An input that can change in the short run.

Question 8

Marginal product

Answer 8

The additional amount of output obtained from adding one more unit of input

Question 9

Specialization

Answer 9

Workers develop specific skill sets so as to increase total productivity.

Question 10

Law of Diminishing Returns

Answer 10

At a certain point of successive increases in inputs, marginal product begins to decrease.

Question 11

Cost of production

Answer 11

What the firm must pay for its inputs,

Question 12

Total Cost

Answer 12

Total cost = Variable cost + Fixed cost

Question 13

Variable costs (VCs)

Answer 13

Those costs associated with variable factors of production.

Question 14

Fixed cost (FC)

Answer 14

A cost associated with a fixed factor of production, such as structures or equipment, and therefore does not change with production in the short run

Question 15

Average total cost (ATC)

Answer 15

Total cost/Total output

Question 16

Average variable cost

Answer 16

Total variable cost/Total output

Question 17

Average fixed cost (AFC)

Answer 17

Total fixed cost/total output

Question 18

Marginal cost (MC)

Answer 18

Marginal cost=Change in total cost/Change in output.

Question 19

Revenue

Answer 19

The amount of money it brings in from the sale of its outputs.

Total revenue=Price×Quantity sold.

Question 20

Marginal revenue (MR)

Answer 20

The change in total revenue associated with producing one more unit of output.

Question 21

Profits

Answer 21

Profits= Total revenues − Total costs

Total Profit = (Price - ATC) x total output quantity

Question 22

Accounting profits

Answer 22

Revenues - explicit costs

Question 23

Economic profits

Answer 23

Total revenue - both explicit and implicit costs.

Question 24

Price elasticity of supply

Answer 24

The measure of how responsive quantity supplied is to price changes

Price elasticity of supply(εs)=Percentage change in quantity supplied/Percentage change in price.

Question 25

Shutdown

Answer 25

A short-run decision to not produce anything during a specific time period.

Question 26

Sunk costs

Answer 26

A special type of cost that, once they have been committed, can never be recovered

Question 27

Producer surplus

Answer 27

= market price - MC curve

1/2 (base x height)

Question 28

Economies of scale

Answer 28

Occur when average total cost falls as the quantity produced increases
Decreasing

Question 29

Constant returns to scale

Answer 29

Occur when average total cost does not change as the quantity produced changes
Constant, strait horizontal line

Question 30

Diseconomies of scale

Answer 30

Occur when ATC increases as output rises

Increasing

Question 31

Exit

Answer 31

A long-run decision to leave the market.

Question 32

Free entry

Answer 32

Entry is unfettered by any special legal or technical barriers

Question 33

Free exit

Answer 33

A firm’s exit is unfettered by any special legal or technical barriers

Question 34

Subsidy

Answer 34

A payment or tax break used as an incentive for an agent to complete an activity.