LESSON 2 MIDTERMS Flashcards
Is an entity that employs resources, or
factors of production, to produce goods and services to be
sold to consumers, other firms, or the government.
business firm
No one orders buyers to increase quantity demanded when the price
increases; they just do it. TRUE OR FALSE
FALSE (REDUCE)
it guides individuals from production of one good into
the production of another. It also coordinates individuals’ actions so that suppliers and
demanders find mutual satisfaction at equilibrium.
The Market
As economist Adam Smith observed, individuals in market setting
are ”led by an?
invisible hand
the process in which individuals perform tasks,
such as producing certain quantities of goods, based on changes in
market forces such as supply, demand, and price
Market coordination
the process in which managers direct
employees to perform certain tasks.
Managerial coordination
They suggest that
firms are formed when benefits can be obtained from
individuals working as a team.
Armen Alchian and Harold Demsetz
Sum of team production > Sum of individual production. TRUE OR FALSE
TRUE
occurs when workers put forth less than the agreed-to
effort.
Shirking
plays an important role in the firm. The they reduces the amount of shirking by firing shirkers and
rewarding productive members
Monitor (manager)
is a person who shares in the profits of a
business firm.
residual claimant
two sides to every business firm
- Revenue Side
- Cost Side
The firm’s objective is to maximize profit. TRUE OR FALSE
TRUE
FORMULA TO GET THE PROFIT
Profit = Total Revenue – Total Cost
cost incurred when an actual (Monetary)
payment is made, such as payment for resources bought and
rented
Explicit Cost
cost that represents the value of resources
used in production for which no actual (monetary) payment
is made, such as opportunity costs
Implicit Cost
the difference
between total revenue and explicit costs
Accounting Profit
the difference between
total revenue and total cost (both explicit
and implicit)
Economic Profit
A firm that makes zero economic profit is said to be earning
abnormal profit. TRUE OR FALSE
FALSE (NORMAL)
is a transformation of resources or inputs into
goods and services
Production
input whose quantity cannot be changed as output
changes
Fixed input
input whose quantity can be changed as output
changes
Variable input
If any of the firm’s inputs are fixed, it is said to be producing in
the long run. TRUE OR FALSE
FALSE (SHORT-RUN)
the change in output that
results in changing the variable input by one unit, holding all
other inputs fixed
Marginal Physical Product
as ever larger
amounts of a variable input are combined with fixed inputs,
eventually the marginal physical product of the variable
input will decline.
Law of Diminishing Marginal Returns
Marginal cost of producing a good
is a reflection of the marginal physical product of the variable input. TRUE OR FALSE
TRUE
is the cost that does not vary with output; it is the cost associated
with fixed inputs
Fixed cost
is the cost that varies with output; it is the cost associated with
variable inputs
Variable cost
Is the sum of fixed costs and variable costs
Total cost
is the change in total cost that results from a change in
output
Marginal cost
As MPP rises, expect costs to rise. As MPP declines,
expect costs to decline. TRUE OR FALSE
FALSE
MPP and MC move in opposite directions. TRUE OR FALSE
TRUE
When MC is above average, the average rises. When MC
is below average, average decreases. TRUE OR FASLE
TRUE
When MPP decreases what happens to Mc?
MC increase
is a cost incurred in the past that cannot be
changed by current decisions and therefore cannot be
recovered.
Sunk Cost
