Exam 4 (11, 12, 13) Flashcards
Production (def)
the process of converting inputs to outputs
Production function (def)
the relationship between the quantity of inputs a firm uses and the quantity of outputs it produces
Fixed inputs
whose quantity is fixed for a given period of time and cannot be varied
Variable inputs
whose quantity the firm can vary at any length of time
Fixed input example
equipment/capital, land, building you’re renting
Variable input example
labor
Short run (def)
time period during which at least one input is fixed
Long run (def)
time period during which all inputs can be varied
Marginal product of an input
the additional quantity of output that is produced by using one more unit of that input
Marginal Productivity of Labor
(Change in Quantity of output) / (change in quantity of labor)
Diminishing returns to an input
marginal product initially rises as more workers are hired, then it declines
Total product curve (Def)
for a given fixed input, it shows how the quantity of output depends on the quantity of the variable input
Total product curve (shape)
upward sloping but gets flatter as more workers are hired because of diminishing returns to labor
Fixed cost (def)
does not depend on the quantity of output produced. It is the cost of the fixed input
Variable cost (def)
depends on the quantity of output produced. It is the cost of the variable input
Total cost =
Fixed cost + Variable cost
Total cost curve (shape)
upward sloping; b/c of the fixed cost, the curve doesn’t start at 0, it starts at the amount = fixed cost
Marginal cost (def)
change in total cost from one additional unit of output
Marginal cost curve (shape)
is upward sloping because of diminishing returns
Average Total Cost
total cost per unit of output produced
= (TC) / (Q)
Average Variable Cost
Variable cost per unit of output produced
= (VC) / (Q)
Average Fixed Cost
fixed cost per unit of output produced
= (FC) / (Q)
–As Q increases, AFC decreases
Spreading effect
larger output means there is more output over which fixed costs are spread leading to lower average fixed cost
AVC curve (shape)
is upward sloping but is flatter than the MC curve
AFC curve (shape)
downward sloping because of the spreading effect
ATC curve (shape)
is U-shaped
MC curve intersects the ATC curve _______.
from below crossing at its lowest point
When MC is below ATC …
ATC is downward sloping (falling)
When MC is above ATC
ATC is upward sloping (rising)
All inputs are ______ in the long-run
variable
Long run ATC curve relationship to short run ATC curve
LRATC curve is the outer envelope of all SRATC curves for different quantities of fixed inputs
Key Characteristics of Perfect Competition
- Many buyers and sellers each w/ a small market share
- The product is standardized across Sellers
- Free entry and exit
Key Characteristic of Perfect Competition:
1. Many buyers and sellers each w/ a small market share
- -Market share = individual output divided by total industry output
- -This means both sellers and buyers are price-takers; their actions have no effect on the price
Key Characteristic of Perfect Competition:
2. The product is standardized across Sellers
–Standardized Product = consumers regard products sold by different producers as equivalent
Key Characteristic of Perfect Competition:
3. Free entry and exit
–New producers can easily enter into an industry and existing producers can easily leave that industry
Total Rev =
P * Q
Profit =
Total Rev - Total Cost
Marginal Rev (def)
change in total revenue generated by an additional unit of outputs
Marginal Rev =
change in total rev / change in quantity
For perfect competition Marginal Rev …
is constant and equal to the market price
Optimal output rule
profit is maximized by producing the quantity of output at which the MR of the last unit produced is equal to it’s MC
Profit =
(Price - ATC) * Q
Break-even price (def)
market price at which a firm earns 0 profit (economic profit)
When do you break even?
If the price is just high enough to cover the ATC
In the short run, firms will choose to produce (even at a loss) if …
they can at least cover their variable costs
–Shortcut: is the price above or below the minimum AVC?
In the long run, new firms enter the market as long as …
there is a positive economic profit
A market is in log run equilibrium when …
the quantity supplied = the quantity demanded and no firms have incentive to enter or exit the industry
Long run Supply curve is …
always flatter (more elastic) than the short run Supply curve
Monopolist (def)
a single producer of a good w/ no close substitute (industry controlled by a monopolist is known as a monopoly)
Market power (def)
the ability of a firm to raise prices
Barriers to entry
- Control of natural resources or inputs
- The diamond industry was controlled by monopolist who had control of the diamond mines - Increasing returns to scale
- Technological superiority
- can’t enter a market if you lack knowledge/technology - Government-made barriers, including patents and copy rights
Demand curve of a perfectly competitive producer
is constant – a perfectly elastic demand curve
Demand curve of a monopolist
downward sloping
MR for monopolies is ___________, but _________ for perfectly competitive
downward sloping; constant
Profit is maximized where
MR = MC
2 Steps for profit maximizing in monopoly
- Choosing a quantity
- Where MR and MC intersect - Choosing a Price
- After picking Q, follow the graph to the demand curve, which shows how much consumers will pay
