ppt 11-13: production function, competitive markets Flashcards
explicit costs
input costs that require an outlay of money by the firm
implicit costs
input costs that do not require an outlay of money by the firm i.e. the fact that i can make $100 as a freelance designer might not cost my cookie business any money, but is a cost to myself bc of the lost opportunity
economic profit
total revenue minus total cost, including both explicit and implicit costs
accounting profit
total revenue minus total explicit cost
Why is accounting profit smaller than economic profit?
Because economists include all opportunity costs when analyzing a firm, including explicit and implicit, whereas accountants measure only explicit costs.
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
marginal product (aka marginal output)
the increase in output that arises from an additional unit of input
diminishing marginal product
the property whereby the marginal product of an input declines as the quantity of the input increases
total-cost curve
on a graph, measures the relationship between quantity produced and total cost of production
Why might the total-cost curve get steeper?
As the quantity of output increases, cost may be higher because of diminishing marginal product -> cost of workers for the marginal output produced becomes less worth it
marginal cost
the increase in total cost that arises from an extra unit of production
(change in total cost) / (change in quantity)
What are the three most common features of a cost curve?
1) Marginal cost rises with quantity of output
2) ATC curve is U-shaped
3) Marginal-cost curve crosses the ATC curve at the minimum of ATC
efficient scale
the quantity of output that minimizes ATC
Why does ATC have a positive relationship with the increase and decrease of marginal costs? Compare with an analogy.
ATC is like cGPA, with MC like the grade in your next course. As the grade in your next course drops, so does ATC. vice versa is true. This results in the MC curve crossing the ATC at the efficient scale. (i.e. getting the same grade in your next course as your cGPA)
Why does a firm’s long run cost curves differ from its short run cost curves?
Because many decisions are fixed in the short run but variable in the long run -> thus division of total costs between fixed and variable costs depends on the time horizon
economies of scale
long-run ATC falls as quantity of output increases (aka less cost by producing in bulk) -> may occur bc of specialization among workers i.e. in an assembly line
diseconomies of scale
long-run ATC rises as quantity of output increases -> may occur bc of disorganization within firms (messy, overcrowded)
constant returns to scale
long-run ATC stays the same as output quantity changes
Why are ATC curves often U-shaped?
At low levels of production, firm benefits from increased size bc of specialization
At high levels of production, benefit of specialization are realized, but coordination problems because of severe
Therefore ATC falls in the long run at low levels of prod and rises at high levels of prod
isoquant
a curve that shows all the possible combinations of labour and capital that result in the same quantity of production
why does each isoquant slope down?
as capital input declines, labour input must increase if the quantity produced is to remain the same
marginal rate of technical substitution
the rate at which the firm can substitute one input for another while maintaining a constant level of output
= slope of the isoquants
why are competitive markets the ideal type of capitalist market-based economy?
- blueprint of neoclassical economics
- in a comp. market, comp. between sellers keeps prices (mostly) stable
Under Paretos’ Effiency, free entry and free exit can be notated how?
free entry: P>0
free exit: P<0
21st century economics is based on what motto?
“Winner takes all”
How could Pareto efficiency be applied to isoquants?
Suppose a firm has two inputs, labor and capital, and it wants to produce a certain level of output. The firm can choose any combination of labor and capital that will produce that output. The isoquant curve shows all the combinations of labor and capital that will produce that output. The Pareto efficient allocation of inputs is the combination of labor and capital that is on the highest possible isoquant curve for that level of output.
the slope of the production function is equal to what?
market product of labour (MPL)
what are the two characteristics of a competitive market?
- There are many buyers and sellers in the market
- Goods offered by various sellers are largely the same (substitutes)
marginal revenue
the change in total revenue from an additional unit sold
for a competitive firm, the firm’s price is equal to what?
both its average revenue (AR) and marginal revenue (MR)
a competitive firm’s supply curve is equal to what?
the marginal-cost curve
shutdown
a short-run decision not to produce anything during a specific period of time because of current market conditions
exit
a long-run decision to leave the market
when might a firm shutdown?
when total revenue (TR) < variable costs (VC) = TR/Q < VC/Q = P < AVC
when might a firm exit or enter a market?
exit: when P < ATC
enter: when P > ATC
what does a firm’s long-run and short-run supply curve look like below the ATC and AVC, respectively? why?
a right angle (ㄱ but flipped), because at any point lower than the ATC or AVC a firm will exit/shutdown
what is the equation for a firm’s profits?
(P - ATC) * Q
the long-run equilibrium of a competitive market with free entry and exit must have what?
must have firms operating at their efficient scale
zero-profit equilibrium
all competitive firms in the long run eventually make zero profit (because price equals the minimum of ATC, etc.)
what are two reasons why the long-run market supply curve might slope upward?
- some resource used in production may be available only in limited quantities
- firms may have different costs
