Firm Production, Costs, and Revenues Flashcards
Marginal Product (MP)
The additional output produced per period when one more unit of an input is added
Marginal Product Curve (MPC)
Shows the relationship between total product and labor
Law of Diminishing Marginal Returns
States that as the amount of one input is increased, all else equal, the incremental gains in output will eventually decrease
Average Product (AP)
(Total Product)/(Quantity of Input)
Total Product Curve (TPC)
Shows the relationship between the total amount of output produced and the number of units of a input used
Fixed Costs (FC)
Do not change when one more output is produced
Variable Costs (VC)
Change as more output is produced
Marginal Cost (MC)
The amount by which costs increase when one more unit of output is produced (MC = Change in TC/Change in Quantity = Change in TVC/Change in Quantity)
Average Total Cost (ATC)
TC/Q
Average Variable Cost
TVC/Q
Average Fixed Cost
Total Fixed Cost (TFC)/Q
Long Run and Short Run Difference
In the short run, the amount of at least one input cannot change
Economies of Scale
Exist over the range of output were the long-run average cost curve slopes downward
Diseconomies of Scale
Exist over the range of output where the LRAC is increasing
Increasing Returns To Scale
Exist when output increases (proportionally) more than increases in all inputs
Decreasing Returns To Scale
Exist when output increases (proportionally) less than increases in all inputs
Constant Returns To Scale
Exist when output increases in proportion to increases in all inputs
Diminishing Marginal Returns
Exist when an additional unit of an input increases total output by less than the previous unit of input
Increasing Cost Firm
A firm facing decreasing returns to scale
Decreasing Cost Firm
A firm facing increasing returns to scale
Increasing Cost Industry
Experiences increases in average production costs as industry output increases
Constant Cost Industry
Does not experience increases production costs as output grows
Decreasing Cost Industry
Experiences decreasing average production costs as industry output increases
Productive Efficiency
Occurs when a firm produces at the lowest unit cost where MC = AC
Economies of Scope
Exist when a firm’s average production costs decrease because multiple products are being produced
Perfect/Pure Competition Characteristics
- Many Sellers
- Standardized Product
- Firms are Price Takers
- Free Entry and Exit
Price Takers
Accept the market price as given and can sell all that they want at that price
Economic Profits
Total Revenue - Total Cost (Includes Opportunity Costs)
Accounting Profits
Consist of only the monetary costs of the firm
Normal Profits
Earning a return equivalent to the opportunity cost of time (Economic Profit is 0)
Total Revenue (TR)
The amount of money taken in from the sale of a good (TR = P*Q)
Marginal Revenue (MR)
The addition to revenue gained from one more unit sold (MR = Change in TR/Change in Q)
Average Revenue (AR)
TR/Q
Profit
TR - TC
Shut Down Decision
Based on whether the firm in a perfectly competitive market covers their AVC
Monopoly Characteristics
- Patents
- Control of Resources
- Economies of Scale and Other Cost Advantages
- Exclusive Licenses
Price Discrimination
Charging different customers different prices that do not reflect differences in production costs
Perfect Price Discrimination
Ideal for a firm to charge every customer the most they are willing to pay and turning consumer surplus into profit
Oligopoly
An industry with a small number of firms selling a standardized/differentiated products
Market Power
The ability of an individual firm to influence price
Game Theory
Considers the strategic decisions of players in anticipation of their rival’s reactions
Payoff Matrix
Illustrates decisions and reactions among players
Nash Equilibrium
Occurs whenever two circles appear in the same square within the payoff matrix
Dominant Strategy
Strategy with the most payoff for the player
Dominant Strategy Equilibrium
When all players choose the dominant strategy in order to receive a benefit
Prisoner’s Dilemma
Explain arms races, failure of cartels, and excessive spending on ads
Natural Monopolies
Industries that can only support one firm
Sherman Act (1890)
Declared attempts to monopolize commerce or restrain trade among the states illegal
Clayton Act (1914)
Specified that monopolistic behavior such as price discrimination, tying contracts, and unlimited mergers are illegal
Robinson-Patman Act (1936)
Prohibits price discrimination except when it is based on differences in cost, marketability of the product, or in good faith to meet competition
Celler-Kefauver Act (1950)
Authorized the government to ban vertical, conglomerate, and horizontal mergers
Vertical Mergers
Mergers of firms at various steps in the production process from raw materials to finished products
Conglomerate Mergers
Combinations of firms from unrelated industries
Horizontal Mergers
Mergers of direct competition
Herfindahl-Herschman Index (HHI)
Takes the market share of each firm in an industry as a percentage, squares each percentage, and adds all of them
Concentration Ratio
The sum of the market shares of the largest n firms in an industry, where n is any number
