Lecture 22: Finishing Cost curves and starting Theory of the Firm Flashcards
The production function can be used to determine what?
the costs of production
The total cost curve shows the relationship between what?
the quantity a firm can produce and its total costs
Why does total cost get steeper as the quantity of output increases because of what?
diminishing marginal product
Define fixed cost
cost that does not vary with the quantity of output produced
Define variable costs
costs that varies with the quantity of output produced
Does fixed cost change in the short run?
no
Total cost (TC) =
fixed cost (TFC) + variable cost (TVC)
Define marginal cost
The increase in total cost that arises from an extra nit of production
When output is zero, there is no __________ cost which means that __________ cost equals what?
variable
total
the cost to produce zero units
How can we calculate marginal cost?
change in total cost/change in output
MC = ΔTC/ΔQ
What is average variable cost equal to?
total variable cost/quantity
TVC/Q
What is average fixed cost equal to?
total fixed cost/quantity
TFC/Q
What is average total cost equal to?
total cost/quantity
TC/Q
Is marginal cost always increaing?
no, often in the beginning it is not
Whaat does it mean if marginal cost is increasing straight away?
it means that law of diminishing marginal returns applies straight away
The marginal cost curve always crosses the average cost curve where?
at their lowest point
What are three important properties of cost curves that typically hold true?
- marginal cost eventually rises with the quantity of output
- the ATC curve is U shaped
- MC crosses the ATC at it’s minimum point
- MC crosses the AVC at it’s minimum
One of the properties of cost curves is that MC rises with the quantity of output. Why is this?
due to diminishing marginal profit
Explain why the ATC curve is U shaped
- at very low levels of output, ATC is high because TFC is spread over only a few units
- AC declines as output increases because AFC decreases
- AC starts rising because AVC rises substantially
- the quantity that minimises the AC is called the efficient scale
What is the quantity called that minimises the AC?
efficient scale
MC crosses the AC at the efficient scale (minimum AC). This means whenever MC is less than AC, AC must be
falling
MC crosses the AC at the efficient scale (minimum AC). This means whenever MC is more than AC, AC must be
rising
Efficient scale is the quantity of output that minimises AC, hence, at the efficient scale, AC is what?
neither rising or falling
Define economies of scale
long-run average total cost falls as the quantity of output increases
Define diseconomies of scale
long run average total cost rises as the quantity of output increases
Define constant returns to scale
Long-run average total cost stays the same as the quantity of output changes
What are 5 features of competitive markets?
- there are many buyers and sellers in the market
- the goods offered by the various sellers are largely the same
- there is perfect information
- they are price takers
- firms can freely enter or exit the market (in the long run)
What does is mean when there are price takers in a competitive market?
buyers and sellers have no individual influence over the price
What sort of demand curve does a firm in a competitive market face? Why is this?
the demand curve is perfectly elastic (ie. horizontal demand curve)
Define average revenue
revenue a firm receives for the typical unit sold
AR = TR/Q
Define marginal revenue
extra revenue a firm receives for an extra unit sold
MR = ΔTR/ΔQ
What does is it mean when perfect competitions have perfect information?
businesses share knowledge so there is no intellectual property
