Exam 3 Flashcards
2 complex theories but choosing the one that is in a simpler form
Ockham’s razor
a second defense of the profit maximization assumption
ownership distributed by
-people who are inclined to pursue profit
-others favoring benevolence, ego satisfaction or the easy life
Survivorship Principle
the concept that firms are in business to maximize profits is controversial
Managers display other regarding preferences
1) some spend large amounts of time supporting arts, homeless shelters, environment, etc.
2) others led by egotists risk all; profit to build an empire
3) others earn enough profit; take wednesdays to play golf
profit motive
a complete description of the motives of businesses
-survive the market
profit maximization
revenue-cost
profit
explicit payment to suppliers of factors of production and intermediate goods
-include worker’s wages, manager’s salaries, salesperson’s commission, payments to banks and other suppliers of financial services, legal fees, etc.
Explicit costs
using resources that a firm’s owners contribute without receiving explicit payment
-an owner of a small firm who works alongside the firm’s hired employees without receiving a salary (Snow Fun)
Implicit costs
Do firms record their implicit costs?
NO
Accounting profit - Implicit costs
|
revenue - explicit costs
Pure economic profit
profit = revenue - explicit costs only without considering implicit costs
-considers only explicit payments that appear on the firms written accounts
accounting profit
the opportunity cost of capital contributed by the firm’s owners
normal return on capital (normal profit)
payments in excess of opportunity costs
- ex: pure economic rent
- broader notion than profit
economic rent
what entrepreneurs do when they look for ways to create goods and services that are worth more than the inputs they require
-ex: Henry Ford
Profit seeking
when firms seek to increase revenue by seeking restrictions on competition, not through innovation and cost reduction
-ex: cotton and sugar industries have increased revenues by restricting imports
rent seeking
inputs that can be varied within a SHORT TIME in order to increase or decrease output
-ex: labor, electricity, intermediate goods
variable inputs
the explicit and implicit costs of providing variable inputs
-the cost of the variable inputs
variable costs
inputs that CAN NOT be increased or decreased in a short time in order to increase or decrease output
-ex: building a new office; size of the firm’s plant, structure, production equipment
Fixed inputs
explicit and implicit opportunity costs associated with providing fixed inputs
fixed costs
a length of time in which the firm can vary output by using more or fewer variable inputs
-fixed inputs DO NOT change
short run
a time horizon long enough to change fixed as well as variable inputs
long run
costs are subjective?
- fixed costs don’t vary with the firms rate of output
- they are borne by the firm as long as its in business regardless of how much it produces in the short run
fixed costs take the form of periodic payments
-a lease; pay $1,000 monthly
explicit fixed costs
opportunity costs associated with facilities owned by the firm itself, but not reflected on ongoing payments
-buy at the price of $120,000
implicit fixed costs
once-and-for-all costs that a firm can not recover once it incurs them
-having the logo painted on the building for $1,000, company sells the building to buy a better one; therefore, loosing the $1,000
sunk costs
the total output of a firm measured in physical
total physical product
the amount by which output increases as a result of adding one unit of a variable input
marginal physical product
as the variable input increases, the firm will eventually reach a point beyond which the marginal physical product of the firm will begin to decrease
-apply to short run
law of diminishing returns
the increase in cost required to increase the output of some good or service by 1 unit
sum of Total cost/sum of output
marginal cost
the rule that marginal cost must equal average cost when average cost is at its minimum
marginal average rule
in any output range in which long run average cost decreases as output increases
1) technology
2) internal organization: teamwork, specialization, comparative advantage
economies of scale
the marginal cost curve intersects the minimum points of the average total cost curve and average variable cost curve
minimum points
in any output range in which long run average cost increases as output increases
1) organizational
2) as firm grows, more dependent on hierarchical means of coordinating its employees activities
3) individual incentives become harder to maintain in a hierarchial
- ex: walmart and toyota
diseconomies of scale
any range of output for which long run average cost curve does not change as output varies
constant returns to scale
business managers make a serious attempt to record costs in numerical form
true
opportunity costs measure
the value of alternative uses of resources
when a firm hires an additional worker and production output increases, this is called
marginal physical product
the law of diminishing marginal returns has an exception, which of the following is the exception
there are no exceptions
in the short run, firms can
adjust some, but not all inputs
- varied inputs can vary
- fixed inputs can not vary
the point where economies of scale end and constant returns to scale begin
minimum efficient scale
constant returns to scale occur when the long run cost curve do not vary with increases in output
true
in economics there are 3 average costs
true
- average fixed cost
- average total cost
- average variable cost
the long run average cost curve is constructed by fitting a line that is tangent to a series of short run average total cost curves
true
assume that the cost curves are all functioning normally, which curve is not U shaped?
average fixed cost
The ‘ideal type” of market is
perfect competition
a market in which a homogeneous product is sold is
perfect competition
the perfect competition firm is
a price taker
a price taker means a firm that sells its products at a price determined by forces outside the firms control
true
a market which only has differentiated products is
monopolistic competition
perfect competition is a market structure containing many small firms
true
in the perfect competitive market there are no sunk costs
false
a market which has substantial (common) barriers to entry is
monopoly
one of the key assumptions of perfect competition is
firms have the same long and short run cost curves
free market entry means
firms with sufficient capital can enter if they wish
- resembles perfect competition
- many small firms
- easy entry and exit
- firms products differ from one another
monopolistic competition
- market with only a few firms, some of which have a significant share of the market
- product may be homogeneous or differentiated
- may/may not be significant barriers to entry
- buyers and sellers need not have equal access to all kinds of information
- most familiar markets fit this category
oligopoly
- a single firm accounts for 100% of sales of a product that has no close substitutes
- perfect competition and monopoly are ideal type market structures
- few markets fit the definition
monopoly
all buyers have complete information about the price of the product and of the inputs used to produce it
- producers have equal knowledge/production techniques
- know all about the products characteristics
equal access to information
firms that are just starting to produce the product can do so on an equal footing with existing firms in terms of the prices paid for inputs, availability of technology, access to government permit/licenses
easy entry and exit from industry
firms products are so alike that they are perfect substitutes in the buyers eyes
homogeneous product
each firm is small that its actions, alone have no noticeable effect on the market price
significant share of the market
- presence of many firms (ALL SMALL)
- none with a significant share of the market
- product is homogeneous
- easy entry and exit from industry
- equal access to information by buyers and sellers
perfect competition
- conditions that shape the competition in a market
- depends on the number and size of firms
- the nature of the product
- ease of entry and exit
- availability of information
market structure
how many market structures are there?
4
what do firms in the market have access to?
- same technology
- know where to buy inputs at the same prices
what do economies of scale cease in perfect competition?
a small level of output relative to the quantity demanded by the market
-producing at the minimum long run average cost
a firm that sells its output at prices determined by forces beyond its control
- if 1 price were to raise the price of its output above prevailing price, it would lose all its customers
- perfectly competitive firm
price taker
- firms leaving the firm can recover implicit fixed costs by selling their plant and equipment to other firms
- requirement of free entry and exit
no sunk costs
what is the difference of fixed and variable inputs?
depending on the context of decisions around them
total variable cost/output
average variable cost
total fixed cost/output
average fixed cost
total cost/output
average total cost
as the VARIABLE INPUT increases, all other inputs remain fixed, the firm will reach a point where marginal physical product begins to decrease
law of diminishing returns
