Chapter 7 - Producers in the short run

Question 1

6 types of firms

Answer 1

Single proprietorships, Ordinary partnerships, Limited partnerships, Corporations, State-owned (crown) corporations, Non-profit organizations

Question 2

One other type of firms

Answer 2

transnational corporations (TNCs) or multinational enterprises (MNEs)

Question 3

2 types of (financial) capital firms use

Answer 3

equity and debt

Question 4

what is equity and what happens w/ firm profits

Answer 4

way to acquire funds from the owners. Synonym for stocks or shares. (actions). Profits may be distributed as dividends

Question 5

how firm uses debt for financial capital

Answer 5

give bonds to lenders (of money). they will have to give them their money back with interest

Question 6

who are the firm’s creditors

Answer 6

the lenders (not the owners)

Question 7

2 key assumptions of economists about firms

Answer 7

1) Profit-maximizers

2) Assumed to be a single, consistent, decision-making unit

Question 8

What firms must do aside maximizing profits

Answer 8

Become socially responsible

Question 9

How can we respond to socially irresponsible firms (2)

Answer 9

1) Duty of gvt to set rules

2) Expression of consumers’ preferences in the market place

Question 10

4 types of inputs firms use for production

Answer 10

1) Intermediate products
2) Inputs provided by nature
3) Inputs provided by people (such as labour services)
4) Inputs provided by services of physical capital (machines)

Question 11

Production function

Answer 11

q = f(L,K) relation between labour/capital and output

Question 12

production flow or stock

Answer 12

flow

Question 13

Profits formula

Answer 13

Total revenue - Total cost

Question 14

Accounting profits formula

Answer 14

Total revenue - Explicit cost

Question 15

Economic profits formula

Answer 15

Total revenue - (Explicit + Implicit costs)

Question 16

Implicit cost what it is

Answer 16

opportunity cost of the owner’s TIME and CAPITAL in the firm’s cost

Question 17

what a positive economic profit means

Answer 17

Owner’s capital is earning more than it could in the next best alternative use

Question 18

what an economic profit of zero means

Answer 18

Owner interested in continuing production

Question 19

what a negative economic profit means

Answer 19

Owner must consider other options (capital not used to its best)

Question 20

Firm’s economic profit formula

Answer 20

Pi = TR (total revenue) - TC (total cost)

Question 21

What is TR (how do you find it)

Answer 21

q x p

Question 22

What is TC (how do you find it)

Answer 22

explicit + implicit costs

Question 23

what TR depends on

Answer 23

type of demand the firm faces

Question 24

What TC depends on

Answer 24

Time horizons for decision making (will affect how firm can change capital and labour)

Question 25

Short run def

Answer 25

Length of time over which some of the firm's factors of production are fixed, generally capital is fixed in short run

Question 26

Long run def

Answer 26

Length of time over which all factors of production of firm can vary but technology is fixed

Question 27

Very long run def

Answer 27

Length of time over which all firm's factors of prod. can vary and its technology can vary

Question 28

Production function in the short run

Answer 28

q = f(L,K bar)

Question 29

Total product

Answer 29

Amount of output produced in a certain period

Question 30

Average product

Answer 30

AP = TP / L where L is labour or could also be another unit of the variable factor.

Question 31

Marginal product

Answer 31

MP = ▲TP / ▲L (change in total product of one more unit of variable factor (labour)

Question 32

Law of diminishing returns where it applies and what it is

Answer 32

Short run. If a variable factor is fixed, MP is likely to fall.

Question 33

MP graph important point

Answer 33

Point of diminishing returns (maximum)

Question 34

What is the point where average product crosses MP

Answer 34

Maximum point of average product

Question 35

Total cost formula

Answer 35

TC = TFC + TVC

Question 36

Average total cost formula

Answer 36

Total cost formula divided by Q --> ATC = AFC + AVC

Question 37

what MC is

Answer 37

MC = ▲TC/▲Q | Increase in total cost resulting from producing one more unit of output

Question 38

what part of TC changes in the short run

Answer 38

TVC

Question 39

Shape of MC curve and why (2)

Answer 39

U-shaped. 1) Each worker costs the same. 2) When MP reaches its maximum, MC reaches its minimum

Question 40

In terms of calculus what is MC

Answer 40

slope of TVC curve

Question 41

what is the point where MC and AVC and what is the point where MC and ATC cross

Answer 41

minimum of ATC and AVC

Question 42

behaviour of AFC curve and what this is called

Answer 42

AFC = TFC/Q Q increases so AFC decreases. It is called spreading the overhead

Question 43

Distance between ATC and AVC curves with increasing output

Answer 43

Distance between the curves decreases with increasing output because it corresponds to AFC (and AFC decreases with increasing output)

Question 44

relationship between AVC and AP

Answer 44

same as MC and MP. AVC reaches its minimum when MP reaches its maximum

Question 45

What is a firm's capacity (2)

Answer 45

1) Level of output that corresponds to the minimum short-run ATC 2) Largest level of output without encountering rising of average cost per unit

Question 46

What is excess capacity

Answer 46

Firm that produces output less than the point of minimum ATC. (excess capacity cause capable of doing more)

Question 47

what happens to MC and AVC when firm doesn't use its capital to its maximum -possible even though capital is fixed- (machines not used to their maximum, less employees)

Answer 47

MC and AVC stay the same

Question 48

ATC and MC curves change if price of variable factors changes

Answer 48

If price increases, ATC and MC increase. If price decreases, ATC and MC decrease

Question 49

Additional curve concerning the TFC

Answer 49

There is a short-run cost curve for each given quantity of the fixed factor. Ex : cost of machines vs number of machines