Final Exam Flashcards
profit
= total revenue - total cost
total revenue (TR)
-the amount of money a firm receives
= total quantity x price
total cost (TC)
the value of inputs to production
= fixed cost + variable cost
implicit cost
- opportunity cost
- input costs that do not require an outlay of money by the firm
explicit cost
input costs that require an outlay of money by the firm
production function
the relationship between inputs (workers, equipment) used to make something and the quantity made
-tends to have an upward curve shape (both axises are quantities)
marginal product
the increase in output from one additional until of input
-marginal product of labor: the increase in output from one additional worker
= change in output (△Q)/change in labor
-> the slope of the production function is the marginal product of labor
diminishing marginal product
when the marginal product to declines as the number of inputs rises
fixed total cost
costs that do NOT vary with the quantity produced
-ex.) rent, contracts
variable fixed cost
costs that do vary with the quantity produced
-ex.) ingredients, hourly employees, electric bill
long run
- more than a year
- all costs are variable
- there is only the ATC
- choice between exiting and staying –> moves the profit towards zero
short run
- one year or less
- both fixed and variable costs
- profit in the short run: entry
- losses in the short run: exit
- can’t exit
- ATC is always above AVC
average total cost (ATC)
= average fixed cost (AFC) + average variable cost (AVC)
- graph is U-SHAPED
- each value is divided by the quantity produced
- average fixed cost graph DECLINES
- average variable cost graph INCREASES
marginal cost (MC)
the cost of producing 1 more quantity
= △TC/Q
-the graph INCREASES
-marginal cost and marginal product move in OPPOSITE DIRECTIONS
-for an individual firm, the supply curve is the MC curve
economies to scale
long-run average total costs FALLS as the quantity increases
-the downward piece of the average total cost curve
diseconomies of scale
long-run average total cost RISES as the quantity increases
-the upward piece of the average total cost curve
constant returns to scale
long-run average total costs stays the SAME as quantity increases
-the middle piece of the average total cost curve
competitive markets
- many buyers and sellers
- products are identical
- firms are price takers - demand for an individual firm is perfectly elastic
- > price taker: don’t decide what price to sell their product at
average revenue (AR)
= TR/Q = (P x Q)/Q = P
marginal revenue (MR)
revenue for each additional unit = P
= △TR / △ Q
when demand is perfectly elastic (in a perfect competitive market)…
MR = P = AR = D
-this occurs when profit is maximized
MC = P or MC = MR
in the short run, when might a firm choose NOT to produce at all?
when TR < TVC, which means that P < AVC
in the short run, when might a firm choose to produce, but at a loss?
they will operate at negative profit if P > AVC, but P < ATC
monopolies
entire market with only 1 seller - without any close substitutes
- face a downward sloping demand curve
- MR < P
- MC > P
