unit 3 Flashcards
production function
shows the relationship between the quantity of inputs and the quantity of outputs
long run production functions
all inputs are variable
short run production function
at least one input is fixed, the inputs can be varied
increasing marginal returns
at low quantities of workers hired, each additional worker is going to increase the Total product at an INCREASING rate
Marginal product increasing, total product was increasing at an increasing rate
diminishing marginal returns
increasing the the amount of workers hired will still increase the total product BUT it will increase at a DECREASING rate
when marginal product begins to decrease but it is still positive which means total product is increasing at a decreasing rate
Negative returns
as more workers are hired, total product will begin to fall
total product decreasing, and marginal product is negative
marginal product
change in total product / change in quantity of labor
slope of TP curve is MP
where would diminishing returns set in?
the FIRST WORKER where you would see a DECREASE in marginal product
after which worker would diminishing returns set in?
the worker BEFORE the one where it first starts to decrease
Total product is at its max when
Marginal product is 0
what does increasing marginal returns come from
specialization
reason for diminishing marginal returns
more workers spread between fixed amount of capital so the equipment gets used, becoming less efficient over time so you product would start to decrease if your machines aren’t working to produce it
reason for negative marginal returns
more workers get in each others way and reduce production
average product is
total product / quantity of labor
whenever MP > AP the AP is
rising
whenever MP < AP the AP is
falling
Marginal Cost is
change in VC / change in TP
or change in total cost / change in quantity
what happens to MC due to specialization
at Low units of outputs the marginal costs will begin to fall (upward curve in the MC curve)
when MP is rising MC is
falling
When MP is falling, MC is
rising
is AP is rising, AVC is
falling
If AP is falling, AVC
is rising
to calculate AFC
fixed cost / Quantity or Total Product
to calculate AVC
Variable cost / Quantity or TP
fixed cost
usually the rent, FC doesn’t change
To calculate Variable cost
(units of labor x employee cost) + (total product x cost of resources)
or
cost per unit x total number of units
or
TC - FC
or
Total cost of materials + total cost of labor
changes as more output is produced
total variable cost
sum of all the MC
to calculate Total cost
add Fixed cost and Variable Cost
OR
ATC x Q
to calculate Marginal Cost
change in total cost / change in total product
to calculate Average fixed cost, AFC
fixed cost / total product
to calculate Average variable cost, AVC
variable cost / total product
TFC - TC
ATC - AFC
to calculate Average total cost, ATC
Total cost / total product
to calculate total fixed cost, TFC
AFC x Q
to calculate TR
price x quantity
to calculate MR
change in TR / change in quantity
Profit is when
MR = MC is above ATC
the point is above the two curves
Breaking even is
MR= MC=ATC
no profit, ATC intersects MR=MC point
operating @ loss is
MR = MC is between ATC and AVC
shut down is when
AVC is above MR = MC
you’re losing more money than just your fixed cost so its best if you shut down
if the company is making no economic profit then
the company is making a normal profit –> which is just when economic profit = 0, your accounting profit is still positive
what are variable resources
resources that change with the number of products produced
law of diminishing marginal returns
that adding an additional factor of production results in smaller increases in output.
in the short run, if you keep adding more of one input (like hiring more workers) to a fixed set of resources (like machinery and workspace), there will come a point where the additional output produced by each additional unit of that input will be smaller than the previous one. This is because the fixed resources can only support so much of the variable input, and as you add more, they become less productive or efficient.
what is the difference between ATC and AVC
AFC which is the area between the two curves
what is LRATC
long run average total cost which is a SUM of all ATC’s
economies of scale means what and is what quadrant on a graph
the first quadrant and it means as production increases, the cost per unit decreases, making it more cost-efficient to produce more. This is often achieved by spreading fixed costs (like machinery or infrastructure) over a larger number of units, which reduces the cost per unit
output increases greater in proportion to input changes
constant returns to scale is in what quadrant and what does it mean
2nd, middle quadrant. It means if you double your production, your cost per unit doesn’t change – it stays constant. This suggests that the company’s cost structure is efficient and doesn’t significantly change as it scales up production
output increases at the same proportional rate as input
the long run ATC is as low as it can get
what quadrant is diseconomies of scale and what does it mean
in the last quadrant and it means as production increases beyond a certain point, the cost per unit goes up, making it less cost-efficient to produce more. This can happen when the organization becomes too large or complex, leading to inefficiencies that drive up costs
output increases at a lower proportional rate than input changes
increasing as the firm gets too big and difficult to manage
what does LRATC not have
fixed cost
what are variable costs
costs for variable resources (changing) that do change as the amount produced changes
total cost
sum of fixed cost and variable cost
what is marginal costs
the additional costs of 1 additional output (the production of 2 more workers equals more output)
what is long run used for
the long run is used for planning. firms use the long run to identify the results of something in the future
what happens when the Lon run average costs falls
a mass production technique is used to change what is happening in the long run
what is the first characteristic of a perfect competition
Price takers- they have to take whatever the price is in the Market because if a firm charges more than market price, no one will buy
second characteristic of perfect competition is
lots of competitors, there’s so many so they have to take the price
their characteristic of a perfect competition is
standardized products- so they all make and sell the same product(s)
fourth characteristic of perfect competition is
Free entry and exit of the market - If firms aren’t making money they’ll leave the market and if they are profiting then they’ll join
fifth characteristic pf perfect competition is
zero economic profit- so when the firms break even, MR=MC =ATC
what is the difference between diminishing marginal returns and negative marginal returns
diminishing marginal returns indicate a reduction in the rate of increase of additional output with each unit of input, while negative marginal returns suggest that the addition of one more unit of input causes a decline in the total output
what is true about economies of scale and increasing returns to scale
economies of scale refers to the relationship between long run average total cost and the size of the firm. increasing returns to scale refers to the relationship between inputs and outputs
If TR> TC, then you have a
Economic profit
If TR=TC
the firm breaks even, normal profit
If TR<TC
Economic loss
If MR> MC,
Firms should produce more output
If MR< MC,
firms should produce less output
MR = MC
Profit maximization
Breaking even is when
MR=MC=ATC
and
TC=TR
Where is profit maximized for cost
where TR> TC
When firms exit the market because they are earning an economic loss
They will exit the market and the prices will rise which will cause economic profit to go back to 0
Marginal Revenue (MR) also represents
Average revenue, demand, and price
what is true if average total cost is decreasing
marginal cost is less than the average cost
AVC can be found by
VC/Q
or
TC-FC/Q
AP
TP/Q
rises when MP is above it and falls when MP is below it
firms will always produce in the elastic or inelastic portion of the graph?
elastic (middle and/or above)
Fixed cost continuously falls as what increases and why
Quantity increases because the same fixed cost is divided by a larger and larger quantity
AVC falls and rises when
falls when MC is below it and rises wen MC is above it
reaches its minimum when it intersects the MC curve
Marginal costs are
change in TC/ change in quantity
or
change in TVC / change in quantity
Decrease in the beginning b/c the first few units of input produce more additional output than the units before them
Eventually increases due to the law of diminishing marginal returns
productive efficiency
Price = minimum ATC
Allocative efficiency
Price = Marginal cost
AR is
TR / Q
when TR is greater than TC, the vertical distance represents what
profits
when TR is less than TC, the vertical distance represents
losses
P > ATC
firms are making economic profits
AVC<P<ATC
firm is incurring economic losses but will stay open
what are the two options in the short run is the fit is operating @ a loss
i. Shut down and not incur variable costs, but not obtain any revenue for fixed costs
ii. Remain open and cover all of its variable costs (b/c P > AVC), and pay off some of
its fixed costs with the difference between P and AVC
1. Better of the two alternatives
P < AVC
firm is incurring losses and will shut down as it can’t cover its variable costs
MC curve decreases
when there is increasing marginal product
mc curve increases
when there is decreasing marginal product
what would shift the Lorenz curve inwards
an increase in progressive taxes
whats the gini ratio
a measure of income equality
as the ratio gets closer to zero, the more equally the income is distributed.
as the ratio gets closer to one, the more unequally the income is distributed
