Lecture 5 (Production and perfect competition) Flashcards
Two types of inputs in a firm
Fixed and variable
Production function
Relationship between quantity of input and quantity of output
Marginal cost (MC) formula
MC = ΔTC
Average total cost (ATC)
TC/Q
When to produce more or less
Produce less:
MC > Market price
Produce more:
MC < Market price
The spreading effect meaning
The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost
The diminishing returns effect meaning
The larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost
The minimum-cost output
the quantity of output at which average total cost is lowest—the bottom of the U-shaped average total cost curve.
increasing returns to scale meaning
long-run average total cost declines as output increases
decreasing returns to scale meaning
long-run average total cost increases as output increases
constant returns to scale meaning
long-run average total cost is constant as output increases
when is a good a standartized good/commodity?
when consumers regard the products
of different producers as the same good.
optimal output rule meaning
profit is maximized by producing the quantity of output
at which the marginal revenue of the last unit produced is equal to its marginal cost
price-taking firm’s optimal output rule meaning
price-taking firm’s profit is
maximized by producing the quantity of output at which the market price is equal to the
marginal cost of the last unit produced
