Chapter 10: Cost and Industry Structure Flashcards
Firm/Business
Combines inputs of labor, capital, land, and component materials to produce outputs
Production
Any process or service that creates value, including manufacturing, transportation, distribution, wholesale, and retail
Perfect Competition
Many firms, identical product
Monopolistic Competition
Many firms, similar but not identical products
Oligopoly
Few firms, identical or similar products
Monopoly
One firm, no competition
Private Enterprise
Ownership of businesses by private individuals
Total Revenue (equation)
Price x Quantity of Output = Total Revenue
Explicit Costs
Payments actually made, out-of-pocket costs
Implicit Costs
Opportunity cost of using resources already owned by the firm (owner working for no salary, home used as a workplace, depreciation, etc)
Accounting Profit
Total Revenue - Explicit Costs
Economic Profit
Total Revenue - Explicit Costs - Implicit Costs
Fixed Costs
Expenditures that do not change regardless of the level of production (rent)
Variable Costs
Incurred in the act of producing (labor, raw materials, etc)
Diminishing Marginal Returns
Total costs of production begin to rise more rapidly as output increases
Average Total Cost
Total cost divided by the quantity of output
Marginal Cost
Additional cost of producing one more unit of output. Calculated by change in total cost divided by change in quantity
Average Variable Cost
Variable cost divided by quantity of output
Sunk Costs
Fixed costs that cannot be recouped
Average Profit
Profit divided by quantity of output produced
Approximate number of workers at a “large” firm
500
Approximate percentage of the American workforce that works at “large” sized firms
50% / Half
Approximate percentage of the American workforce that works at firms with 100 workers or less
35% / One Third
What is the economic concept behind big box warehouse stores, like Costco and Walmart?
Economies of Scale:
as quantity of output goes up, cost per unit goes down
LRAC Curve
Long Run Average Cost Curve
Based on a group of short-run average cost curves, each of which represents one specific level of fixed costs
Diseconomies of Scale
Occurs when a firm grows so large that the costs per unit increase (related to diminishing marginal returns)
Constant Returns to Scale
Occurs when allowing all inputs to expand does not much change the average cost of production
Can a firm experience Economy of Scale and diminishing marginal returns at the same time?
Yes. DMR refers to the short-run average cost curve in relation to increase of a single variable, and EOS refers to long-run average cost curve where all inputs are increasing.
What is an example of “diseconomy” effects of living in urban areas? (in other words, as the input of population grows, the negative effects)
Traffic congestion
Overcrowded facilities
Pollution from high density
If the LRAC (Long Run Average Cost) curve has a single point at the bottom, what does this say about firms in the market?
Competing firms will be about the same size
If the LRAC (Long Run Average Cost) curve has a flat-bottomed segment of constant returns to scale, what does this say about firms in the market?
Competing firms may be a variety of sizes
Does technology always increase the advantage of larger firms, or lead to a greater average size of firms?
Not necessarily. This was the case for much of the 20th century. New technologies make make it easier for small firms to reach beyond their local geographic area, but it also could create “winner take all” markets such as Microsoft or Amazon.
Long Run
Time period in which all costs/inputs are variable (for example, the long run is over a year away when the fixed cost of your lease is up so you can change this input)
