Secton2.2 Flashcards
What is a firms goal?
Maximize Profit
What is Depreciation?
The fall in value of a firm’s capital
What is ecconomic porfit?
Economic Profit is equal to the total revenue minus the total cost, with total cost measured at the oppurtunity cost of production.
What is the Oppurtunity Cost of Production?
The value of the best alternative use of the resources that a firm uses in production. – What else can you do with what you are using.
What is Implicit Rental Rate?
When a firm uses its own capital.
What is Economic Depreciation?
Economic Depreciation is the fall in the market value of a firm’s capital over time.
What is forgone interest?
When a firm uses funds to buy capital, they are giving up the chance to use those funds to purchase bonds which would gain iterest.
What three constraints limit a firms economic profit?
Technological constraints, information constraints and market constraints.
What is technological efficiency?
The firm is producing a given output using the least amount of inputs.
What is economic efficiency?
The firm produces a given output at the least cost.
What is the Short Run?
The short run is a period of time in which the quantity of at least one factor of production is fixed.
What is the long run?
The Long Run is a period of time in which the quantities of all factors of production can be varied.
What is Sunk Cost?
Sunk Cost is past expenditure that has no resale value – Something you sepnd previously that is irrelevant to the current time.
What is Total Product?
Total Product is the mazimum output that a given quantity of labor can produce.
What is Marginal Product?
Marginal Product of labor is the increase in total product that results from a one unit increase in the quantity of labor employeed.
What is the Average Product?
The Average Product of Labor is equal to the total product divided by the quantity of labor employed.
What does the Total Product Curve tell us?
The total product curve tells us what is attanable (below the curve) to what is unattanable (what is above the curve)
What are diminishing Marginal Returns?
Diminishing Marginal Returns occur when the marginal product of an additional worker is less then the marginal product of the previous worker.
What is the Law of Diminishing Returns?
As a firm uses more of a cariable factor of production with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes. – The more you produce, the harder it is to keep up production numbers.
What is a firms Total Cost (TC)?
Total cost is the cost of all the factors of production it uses. Total Cost is also the sum of Total Fixed Cost and Total Variable Cost.
What is Total Fixed Cost (TFC)?
Total Fixed Cost is the cost of a firms fixed factors. i.e. the cost of renting the machines.
What is Total Variable Cost (TVC)?
Total Variable Cost is the cost of the firms variable factors. i.e. Labor
What is Marginal Cost?
A firm’s Marginal Cost is the increase in total cost that results from a one unit increase in output.
How do we calculate Marginal Cost?
We calculate the MC as the increase in total cost divided by the increase in output.
What is Average Fixed Cost (AFC)?
Average Fixed Cost is the total fixed cost per unit of output. AFC = TFC divided by Quantity
What is Average Variable Cost (AVC)?
Average Variable Cost is total variable cost per unit of output. AVC = TVC divided by Quantity
What is Average Total Cost (ATC)?
Average Total Cost is the total cost per unit of output. ATC = TC divided by Quantity
Why is the ATC curve a U shape?
ATC = AFC + AVC. AFC will always be diminishing, while AVC will begin with a decrease, but will eventually slope upward due to the law of diminishing returns.
What two factors shift a cost curve?
Technology and Prices of factors of Production.
What is a firm’s Production Function?
The relationship between the maximum output attanable and the quantites of both labor and capital.
What is the Marginal Product of Capital?
The Marginal Product of Capital is the change in total product divided by the change in capital.
When is a plant said to be economically efficient?
The one that has the lowest average total cost.
What is the Long-Run Average Cost Curve?
When a firm is producing a given output at the least possible cost, it is operating on its LRAC.
What does the LRAC tell the firm?
It tells the firm the plant and the quantity of labor to use at each output to minimize average cost.
What are Economies of Scale?
Economies of Scale are features of a firm’s technology that make average total cost fall as output increases – making the LRAC slope downward.
What are Diseconomies of Scale?
Diseconomies of Scale are features of a firm’s technology that make average total cost rise as output increases – making the LRAC slope up.
What are Constant Returns to Scale?
Constant Returns of Scale are features of a firm’s technology that lead to constant long-run average cost as output increases – If these are present the the LRAC is horizontal.
What is a Minimum Efficient Scale?
The smallest output at which long-run average cost reaches its lowest level.
When is a market said to be in Perfect Competition?
When many firms sell identical products; there are no restrictions to enter the market; Established firms have no advantage; Sellers and buyers are well informed about the price.
What is a Price Taker?
A price taker is a firm that cannot influence the market price because its production is an insignificant part of the total market.
What is Normal Profit?
Normal Profit is the return to entrepreneurship and it is the profit that an entrepreneur earns on average. – What you would make at your best alternative buisness.
What is Total Revenue?
The value of a firm’s sales
What is Marginal Revenue?
The change in total revenue that results from a one-unit increase in the quantaty sold.
If a firm is in perfect competition, what will the firm’s marginal revenue equal?
The Market Price.
What is the Law of Supply?
The higher the market price of a good, the greater the quantity supplied of that good.
What is the Shutdown Point?
The Shutdown Point is the price and quantaty at which the firm is indifferent between producing its good or shutting down.
What is the Short-Run Market Supply Curve?
A curve that shows the quantity supplied in a market at each price when each firm’s plant and the number of firms remains the same.
