Competitive Markets Flashcards
What are implicit costs
Input costs which don’t require an outlay of money by the firm
What are explicit costs
Input costs that require an outlaw of money by the firm
What is the short run
Period of time where some f.o.p can’t be changed
What is the long run
When all f.o.p are variable
What is the production function
The relationship between the quantity of inputs used to make a good and the quantity of output of that good
What is the marginal product of any factor input
The increase in output that arises from an additional unit of input
- MPf=
What is the marginal product of labour
MPl=
What is the diminishing marginal product
The property whereby the marginal product of an input declines as the quantity of the input increases
What are fixed costs
Costs that aren’t determined by the quantity of output produced
Variable costs
Costs that are dependent on the quantity of output produced
What is the average costs
Total cost divided by quantity of output
Av. Fixed costs
Av. Variable costs
1) FC/q of output
2) VC/q of output
What are marginal costs
Increase in total cost that arises from an extra unit of production
Why is there a rising marginal costs curve
Diminishing marginal product
Why is there a U-shaped ATC curve
ATC=AFC+AVC
AFC always declines
AVC typically rises- diminishing marginal product
Efficient scale- the Q of output that minimises the ATC
What are constant returns to scale
The property whereby LR ATC stays the same so the Q of output changes
How do you work out returns to scale
%
What are the characteristics of a competitive market
Many buyers and sellers Homogenous goods Price takers No barriers to entry/exit High level of info avail ale to buyers and sellers
What is average revenue
Total revenue / q sold
What is marginal revenue
Change in total revenue due to an additional unit sold
What is economic profit
TR-TC, including both explicit and implicit costs
What is accounting profit
TR- Total explicit costs
What is normal profit
Min amount required to keep FOP in their current use
What is abnormal profit
Profit above normal profit
Short run decision to shut down
If TR< VC/Q
P < AVC
What are sunk costs
Irretrievable costs
Firms LR decision to enter market
TR/Q (AR) < TC/Q (AC)
P>ATC
LR decision to leave market
TR<ATC
How do you work out profit
TR-TC
(TR/Q - TC/Q) x Q
(P-ATC) x Q
How do you work out profit in the LR
(P-ATC) x Q
Why might the LR supply curve slope upwards
Some resources used in production may be available only in limited quantities
Firms may have different costs
