Demand and Supply Analysis: the Firm Flashcards
Calculate and interpret accounting profit
Net income on income statement (total revenue minus accounting costs)
Calculate and interpret economic profit
Accounting profit minus total implicit opportunity costs
Calculate and interpret normal profit
Normal profit is level of accounting profit that just covers implicit opportunity costs
Calculate and interpret economic rent
Surplus value resulting from fixed supply of particular good causing market price to be higher than cost to bring resource to market
Calculate and interpret total revenue
Price times quantity sold
Calculate and interpret average revenue
Total revenue divided by quantity sold
Calculate and interpret marginal revenue
Change in total revenue divided by change in quantity
Compare accounting, economic, normal profit, and economic rent
If accounting profit exceeds normal profit, market rewards firm. If just equals, no effect. If accounting profit less than normal profit, market punishes firm.
Compare total, average, and marginal revenue
Marginal revenue equals average revenue in competitive market
Describe a firm’s factors of production
land, labor, capital, and materials
Calculate and interpret total costs
Total fixed costs plus total variable costs
Calculate and interpret average costs
Total cost divided by quantity - maximize profit at lowest point on average cost curve
Calculate and interpret marginal costs
Change in total cost divided by change in quantity sold - usually decline initially and increase at higher quantities
Calculate and interpret fixed costs
Sum of all fixed expenses (incl. opportunity costs), which do not change based on quantity
Calculate and interpret variable costs
Sum of all variable expenses (per unit variable cost times quantity) - increases when quantity increases
Calculate and interpret breakeven points of production
Quantity where price, average revenue, and marginal revenue equal average total cost - want lower b/c easier to achieve, but higher should result in greater profits
Calculate and interpret shutdown points of production
Quantity where average revenue less than average variable cost - requires shutting down and just paying fixed costs
Describe approaches to determining profit maximizing level of output
Maximize spread on TR and TC;
MR equals MC; or
Revenue value of output from last unit of input employed equals cost of employing that input unit
Describe how economies of scale and diseconomies of scale affect costs
As firm grows it can move to lower cost structure (economy of scale) or higher cost structure (diseconomy of scale)
Distinguish between short-run and long-run profit maximization
TR>TC - stay in market
MR=MC - maximum profit in short run
TR>TVC; TR<TVC - shut down short term, exit long term
Distinguish among decreasing cost, constant cost, and increasing cost industries - describe long run supply of each
Constant is where output increases by same proportion as increase in inputs. Decreasing/increasing self descriptive.
Calculate and interpret total product of labor
Sum of all inputs during time period
Calculate and interpret marginal produt of labor
Amount of additional output resulting from one more unit of input (assuming other inputs fixed)
Change in total product/Change in Labor
Calculate and interpret average product of labor
Total product divided by quantity of given input
Describe diminishing marginal returns
Adding additional inputs leads to lower marginal products, eventually becoming negative (fixed resources like plant size or quality of labor affect this)
Calculate and interpret profit-maximizing utilization level of an input
Marginal Product times Price of Input
Determine optimal combination of resources that minimizes cost
Marginal Revenue Product = MP times Product Price
Add as much of the highest MRP input and maximize profit when price of input equals MRP
Elasticity of supply
Measures sensitivity in quantity supplied to change in price. Inelastic if change in price does not affect supply, creating economic rents.
