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Microeconomics > Chapter 11 & 12 > Flashcards

Chapter 11 & 12 Flashcards

1
Q

Explicit Costs

A

costs that require an outlay of money; paying for items/ services for firms; ie. rent, electricity, salary paid to workers

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2
Q

Implicit Costs

A

costs that do not require an outlay of money; opportunity costs; ie. labor and capital

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3
Q

Normal Rate of Return

A

rate of return just enough to keep owners and investors satisfied; two opportunity costs are equal and your economic profit is $0

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4
Q

Short Run

A

a period of time where at least one factor of production (LLK) is fized and there is no entry or exit to or from the industry

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5
Q

Long Run

A

a period of time where all factors of production (LLK) are variable and there is free entry or exit to and from the industry

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6
Q

Bases of a firm’s decisions

A
  • market (output) price
  • production techniques available
  • input prices
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7
Q

Optimal Method of Production

A

some production techniques are more labor intensive and others are more capital intensive

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8
Q

Production Function

A

relationship between quantity of input used and quantity of output produced; in the short run constrained by the fixed factor of production; limited by resources and space

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9
Q

Marginal Product of Labor (MPL)

A

the additional product that an additional unit of labor will produce; MPL= change in TP/ change in L

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10
Q

Law of Diminishing Returns

A

Short run phenomenon; in the short run after a certain point (which varies) when additional inputs are added, the marginal product of that input declines; at some point a firm is constrained by a fixed factor of production in the s.r.

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11
Q

Average Product of Labor (APL)

A

average product produced by each variable unit of input; APL= TP/L

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12
Q

Fixed Costs (FC)

A

sum of all costs that do not vary with output even if output is 0; ie. rent, electricity, water

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13
Q

Variable Costs (VC)

A

the sum of all costs that do vary with output in the short run; to produce more output a firm requires more inputs

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14
Q

Total Cost

A

FC+VC

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15
Q

Average Fixed Cost (AFC)

A

AFC=FC/Q; steadily declining curve that approaches but never touches the quantity axis

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16
Q

Average Variable Cost (AVC)

A

AVC=VC/Q; U-shaped; decreases; reaches minimum then increases

17
Q

Average Total Cost (ATC)

A

ATC=TC/Q or ATC=AFC+AVC; U-shaped gets closer and closer to AVC as Q increases

18
Q

Marginal Cost

A

change in the total cost from producing an additional unit; MC=change in TC/change in Q; upside down version of MPL; after minimum diminishing returns set in

19
Q

Long Run Average Cost Curve

A

graph that shows different scales on which a firm may choose to operate in the long run; shape differs; not every LRAC will increase

20
Q

Economies of Scale

A

occurs when you increase the firm’s scale of production and the average cost per unit decreases

21
Q

Constant Returns to Scale (CRS)

A

increase the scale of production and this leads to constant average costs

22
Q

Diseconomies of Scale

A

increase scale of production which leads to an increase in average cost; the reason the firms experience diseconomies of scale in the long run is because they experience waste and mismanagement -> too top heavy; not because of diminishing returns; diminishing returns only occur in the short run because they are constrained by fixed factors of production

23
Q

Long Run Equilibrium

A

at the point where P=MC=SRAC=LRAC (in perfect competition)

24
Q

Market Power

A

the ability to raise prices without losing all of its quantity demanded for that product

25
Q

Perfect Competition

A

an industry structure in which:

  • there are many firms
  • each firm is small, relative to the overall market
  • products are homogeneous (identical)
  • have no market power so they are price takers
  • free entry and exit to and from the industry; there are no barriers to entry
26
Q

Marginal Revenue

A

gives us the change in total revenue from producing an additional unit of output; MR= change in TR/change in Q; in perfect competition D=MR

27
Q

Profit Maximizing Rule

A

as long as MR exceeds MC you want you keep on producing until you hit the profit-maximizing point of output= P=MR=MC

28
Q

Perfect Competition Short Run Scenarios

A
  • Positive economic profits
  • Break Even
  • Earning economic losses (can stay open or shut down)
29
Q

Shutdown Rule

A
  • if TR>VC stay open
  • if TRAVC stay open
  • if P
30
Q

Long Run Scenarios

A
  • making money in the short run you expand in the long run and firms enter
  • breaking even stay as is
  • if losing money in short run firms exit and contract
31
Q

If new firms enter

A

supply shifts to right and prices go down; supply shifts tot he right so much until firms break even or Price equals the point where ATC crosses MC

32
Q

In Perfect Competition in the Long Run

A

all firms break even; P=MC=MR=ATC

Microeconomics (11 decks)

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