Micro Unit 3 Flashcards
Explicit costs
(out-of-pocket costs) are payments made by businesses for running their day-to-day businesses
ex. rent, wages, materials, bills
Accounting profit
Total revenue - explicit costs
Implicit costs
opportunity costs that people or businesses “pay” or give up when they make a decision
ex. forgone wages, forgone time
Economic profit
Total revenue - economic costs*
*economic costs= explicit+implicit costs
Zero economic profit/normal profit
breaking even economically, but still making accounting profit
Profit maximization rule
Firms should continue to produce until the additional revenue received equals the additional cost of production.
Marginal revenue=marginal cost (MR=MC)
Outputs
The products used to earn profit
Inputs
Resources used to make outputs
Total Product (TP)
Total outputs produced
Marginal Product (MP)
Additional output produced
change in total products/change in inputs
Average Product (AP)
Output per unit of input
total product/units of labor
Fixed Resources
Resources that don’t change with quantity produced
Variable resources
Resources that change with quantity produced
Law of diminishing marginal returns
as we add variable resources to fixed resources, the marginal product will begin to fall.
Ex. If a business hires more workers but doesn’t create more work stations, the additional output will begin to fall because of ‘too many cooks in the kitchen’.
Fixed cost
costs for fixed resources that do not change with the amount of production
Variable cost
costs for variable resources that change as the amount of production changes
Total cost
sum of fixed and variable costs
Marginal cost
the additional cost of producing one additional output
change in total cost/marginal product
Why is the marginal product curve an upside-down check mark?
Law of diminishing marginal returns- as more workers are hired, initially product starts to increase but when too many workers are hired, marginal product begins to fall.
Why is the marginal cost curve a check mark?
Inverse relationship between marginal product (MP) and marginal cost (MC); as product increases, the additional cost per unit decreases, but as product decreases, the additional cost per unit increases.
MP and MC curves are mirror images of each other
Why does the average total cost go down and then up, with the lowest point intersecting the marginal cost curve?
- when the marginal cost is below the average, it pulls the average down.
- when the marginal cost is above the average, it pulls the average up
ex. like how your individual nine weeks’ grades affect your average cumulative GPA.
why is long run analysis used by firms
in the long run, all resources are variable. plant capacity and plant size can change. Long run analysis is used for planning; firms use this to identify which plant sizes result in the lowest per unit cost
If a firm increases its number of resources, what are the 3 things that could happen as a result?
- Increasing returns to scale
- Constant returns to scale
- Decreasing returns to scale
Economies of Scale
Long run ATC falls as quantity rises because mass production techniques are used
Diseconomies of scale
Long run ATC increases as quantity rises because the firm gets too big and too difficult to manage
what happens to the ATC of a product when a firm increases its plant capacity?
as firms increase plant capacity, total costs increase but average total costs decrease because of mass production techniques
characteristics of perfect competition
- many small firms
- selling identical products
- low barrier to entry
- no need to advertise
- price takers (no control over price, have to take the price set by the market)
why are firms in completely competitive markets “price takers”?
if a firm charges above the market price, no one will buy the product (bc identical). there’s no reason to lower prices because consumers will buy just as much at the market price.
What are all of the things that the demand curve for firms in a perfectly competitive market show?
MR=D=AR=P
marginal revenue
demand
average revenue
price
how do you show a profit on a firm graph?
ATC below Mr. Darp
how do you show a loss on a firm graph?
ATC above mr. darp
Explain perfect competition in the long run
- all firms are eventually going to break even in the long run (making zero economic profit)
- to get from the short run to the long run, one of either two things will happen: firms enter the market if they see others earning profits or firms leave the market if they are making losses
- Creates an extremely efficient market with zero dead weight loss
Shut down rule
firms should shut down when price is below average variable cost (AVC).
short run supply curve
Marginal cost curve above the average variable cost curve
Per unit tax
-shifts MC, AVC, & ATC
-quantity changes (decreases)
lump sum tax
- shifts AFC & ATC
- quantity doesn’t change; only profit changes
short run
a period in which at least one resource is fixed
productive efficiency
producing cheaply
only long run perfectly competitive firms are productively efficient
allocative efficiency
producing what society wants (price=MC)
Both short run and long run perfectly competitive firms are allocatively efficient
