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ECON 2106 > Week 3 > Flashcards

Week 3 Flashcards

1
Q

What is economic profit?

A

The difference between the revenue that a firm earns and the sum of the opportunity costs of all the resources that are employed at that firm.

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2
Q

How can the firm afford to pay all the resources a salary?

A

As long as revenue is greater than the sum of opportunity costs

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3
Q

How do you know if the business is in trouble?

A

If the revenue drops lower than the sum of opportunity costs, the business is in trouble.

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4
Q

What is accounting profit?

A

The difference between a firm’s total revenue and the explicit expenses that it must pay out.

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5
Q

What happens to accounting profit?

A

It is divided between other resources that are employed in the business that don’t figure explicitly into the costs. (the manager, investors, etc.)

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6
Q

Is there anyway, by looking at the accounting profit, to see if the business will be there in a few years?

A

No.

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7
Q

What is the main difference between economic profit and accounting profit?

A

Economic profit includes the opportunity costs of all the resources employed, not just the ones that explicitly get paychecks.

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8
Q

What is economic rent?

A

The amount of payment an economic resource receives in excess of its next best alternative.

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9
Q

What are sunk costs?

A

The amount of money that you pay that you will never get back. They should not affect current decisions.

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10
Q

How much should a firm produce if it wants to make a profit?

A

We need to study the firm’s technology, costs, and prices.

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11
Q

Technology:

A

How a firm makes a product.

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12
Q

Costs:

A

How much it costs to make a product

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13
Q

Prices:

A

The price a firm can get for a product

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14
Q

What is total output?

A

The total amount of output that a firm can produce with a given amount of input.

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15
Q

What is the short run?

A

A brief period of time during which you can change only one (or a few) of your inputs.

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16
Q

What is the variable input?

A

Labor.

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17
Q

The Total Product Curve:

A
  1. Is S-shaped.
  2. Is Convex when the output is increasing at an increasing rate.
  3. Is Concave when the output is increasing at a decreasing rate.
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18
Q

What happens to the volume of output after is hits its max point on the curve?

A

It begins to decrease overall.

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19
Q

What is the concept of marginal product of labor?

A

It is the change in total product that results from increasing the amount of variable input, labor, by one unit.

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20
Q

What is the function for marginal product of labor?

A

Change of Output
from the
Change of Variable

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21
Q

What does Increasing Marginal Product come from?

A

Teamwork & Specialization

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22
Q

Why does output increase at a decreasing rate once it reaches a certain point of labor?

A

Congestion. You begin to get in the way of the other workers.

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23
Q

How do we represent a firm’s technology?

A

The Marginal Product Curve depicts the slope of the Total Product Curve.

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24
Q

What is one way of labeling ‘Total Product’ on the Total Product Curve?

A

TP(L)

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25
Q

Why? (refer to last question)

A

Total product in the short run is a function of labor. You could do the same for Marginal Product: MP (L)

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26
Q

What is the Average Product of Labor?

A

Total Labor Input

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27
Q

Average Product of Labor Curve:

A
  1. Is U-shaped

2. Rises when MP is above AP; Falls when Mp is below AP.

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28
Q

When do MP and AP intersect?

A

MP always intersects AP at the Maximum AP

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29
Q

Review of firm’s technology in the short run

A
  1. In the short run only labor can be added to increase TP
  2. MP depends on teamwork, specialization, & congestion.
  3. AP is output per worker
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30
Q

Cost Curves:

A
  1. Variable Cost
  2. Fixed Cost
  3. Average Cost
  4. Marginal Cost
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31
Q

Variable Cost Curve:

A

Shows how much money must be spent on labor to produce a given level of output. Once max output in reached, curve goes vertical. You can spend as much money on product as you want, but you can produce anymore of that product.

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32
Q

What is Variable Cost?

A

The cost of hiring the variable input needed to produce a given amount of money

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33
Q

Marginal Cost Curve:

A

Amount it costs to produce one additional unit of output.

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34
Q

What is Marginal Cost?

A

The additional cost incurred to produce an extra unit of output. (Change in VC/ Change in TP)

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35
Q

What happens when productivity increases?

A

Marginal Cost decreases

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36
Q

What happens when productivity is shrinking?

A

Marginal Cost increases

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37
Q

How are costs and productivity related?

A

They are related inversely.

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38
Q

Marginal Cost Curves look like what?

A

A mirrored image of the Marginal Productivity Curve. Just flip one in order to get the other.

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39
Q

What is the Marginal Cost Curve a graph of?

A

It is a graph of the slope of the Variable Cost Curve at every point.

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40
Q

Marginal Cost:

A

MC = Change in VC W x Change in L
——————— = ————————-
Change in TP Change in TP

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41
Q

Marginal Cost Continued:

A 
MC =         W
           ----------------
          Change in TP
            ---------------
           Change in L
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42
Q

Marginal Cost Continued:

A

MC = W
——
MP(L)

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43
Q

MP & MC

A

Marginal Product and Marginal Cost are inversely related.

44
Q

Suppose:

A

MP(L) = 1/4 TV

One worker can make one-fourth of a TV.

45
Q

Then:

A

Four workers = 1 TV

Wages: $1,000/ worker

46
Q

MC = W
—–
MP(L)

A

MC = 1,000 1/4
——— x ——–
1/4 1/4
MC = 4,000

47
Q

When Marginal Product rises:

A

Marginal Cost falls. And vise versa.

48
Q

Marginal Cost:

A

a guide for how much to produce.

49
Q

Average Variable Cost:

A

Tell us if making this much is profitable.

50
Q

Average Variable Cost (AVC):

A

Cost of labor per unit of output produced.

51
Q

AVC formula

A

VC
——
TP

52
Q

If you can only sell a TV set for $150

A

Then you cannot make a profit if you hire employees to make TV for more than $150/ set.

53
Q

Why does Average Variable Cost change as output changes?

A

Because of changes in productivity. Productivity & Cost are inversely related.

54
Q

What is the relationship between MC & AVC?

A

They have the same relationship as MP & AP. (Refer to #27-28)

55
Q

What is the first point you look for on a Variable Cost Curve when you’re going to draw a Marginal Cost Curve?

A

The point of inflection. That is the point where the slope stops decreasing and starts increasing. Also the point where the MC is at a minimum

56
Q

Marginal Cost =

A

The slope of Variable Cost Curve.

57
Q

AVC:

A

1) Is at a minimum where it intersects MC.
2) Where MC is above AVC it pulls the average up.
3) Where MC is below AVC it pulls the average down.

58
Q

Average cost indicates to the firm the profit-maximizing output level. True or False?

A

False.

59
Q

A false statement about slope is:

A

The slope of the marginal cost (MC) curve is greatest when the marginal cost is increasing or decreasing most rapidly.

60
Q

A firm incurs average variable costs of $200 per widget to produce 50 widgets and average variable costs of $199 per widget to produce 51 widgets. What is the marginal cost of the 51st widget?

A

$149. The variable cost to produce 51 widgets is $10,149. The marginal cost of the 51st widget is the difference between the variable cost to produce 51 widgets and the variable cost to produce 50 widgets.
($199 x 51) - ($200 x 50)
= $10,149 - $10,000
= $149

61
Q

The variable cost (VC) for a firm to produce 100 widgets is $1,100. The marginal cost (MC) to produce the 101st widget is $5. What is the firm’s average variable cost (AVC) to produce 101 widgets?

A

$10.94. The variable cost (VC) for the firm to produce 101 widgets is $1,005. To calculate average variable cost (AVC), one must divide the variable cost by the total product (TP).

62
Q

The short run:

A

A brief period of time that is so short that at least one input is fixed.

63
Q

Fixed Costs:

A

DO NOT CHANGE. They are fixed. Always.

64
Q

Average Fixed Costs:

A

Fixed cost per unit of output produced. FC
——–
TP

65
Q

Average Total Cost of Production: (ATC)

A

AFC + AVC

66
Q

ATC =

A

Cost of TV TC
—————- or ——-
# Produced TP

67
Q

What is a non U-shaped curve?

A

The average fixed cost curve

68
Q

A firm’s fixed costs (FC) are $10,000, and its variable costs (VC) to produce 1,000 widgets are $5,000. What is the firm’s the average total cost (ATC) to produce 1,000 widgets?

A

$15. The firm’s average fixed cost to produce 1,000 widgets is $10. Average total costs are average fixed cost plus average variable costs.

69
Q

A firm’s fixed costs (FC) are $10,000. Its variable costs (VC) to produce 100 widgets are $5,000, and the marginal cost of the 101st widget is $10. What happens to the firm’s average total cost (ATC) when the firm produces 101 widgets rather than 100?

A

The average total cost decreases from $150.00 to $148.60. The total costs increase from $15,000 to $15,010. The average total costs are the total costs divided by the number of units produced. $15,000 ÷ 100 = $150.00 and $15,010 ÷ 101 = $148.61.

70
Q

If a firm has only variable costs, average total costs and average variable costs are the same. True or False?

A

True.

71
Q

Where does the Marginal Cost intersect with the Average Variable Cost and the Average Total Cost?

A

It intersects both at their minimums.

72
Q

Average variable cost equals average total cost when there are no fixed costs.

A

True

73
Q

What is one true statement about the Total Cost Curve?

A

The total cost (TC) curve is similar to the variable cost curve.

74
Q

What is a false statement about the Total Cost Curve?

A

he total cost (TC) curve is identical to the marginal cost (MC) curve.

75
Q

A firm has fixed costs (FC) of $10,000. Its variable costs (VC) to produce 5,000 widgets are $2,000 and to produce 10,000 widgets are $3,000. What is the firm’s total cost (TC) to produce 5,000 widgets?

A

$12,000. The variable cost (VC) to produce 5000 widgets is $2,000. The total cost (TC) is the sum of the variable costs (VC) and the fixed costs (FC).

76
Q

A firm has fixed costs of $10,000. The average variable cost to produce 5,000 widgets is $4, and the marginal cost of the 5,001st widget is $1. What is the total cost to produce 5,001 widgets?

A

$30,001. The $4 average variable cost (AVC) times 5,000 units equals $20,000 variable costs for 5,000 widgets. $10,000 fixed costs plus $20,000 variable costs for 5,000 widgets plus $1 marginal cost for the 5,001st widget equals $30,001.

77
Q

the marginal cost curve crosses the average variable cost curve only when the AVC curve slope is:

A

zero. AVC does not have a constant slope.

78
Q

In the long run:

A

All inputs are variable, there are no fixed costs, and the firm can change the scale of its operation.

79
Q

How does the long run differ from the short run?

A

How the costs are determined. In the short run, tools are fixed. In the long run, the scale can be decided independently of the ratio of workers to tools.

80
Q

There are 2 decision that a firm can face in the long run. What are they?

A

1) The choice of Technique.

2) The choice of Scale.

81
Q

The choice of Technique:

A

Labor intensive (more workers, less tools) or Capital intensive (more tools, less workers).

82
Q

What is Technique?

A

The way in which the firm combines its inputs.

83
Q

What is Scale?

A

The size of the operation.

84
Q

The choice of Scale:

A

Small operation (uses few workers and few tools to produce output) or Large operation (uses many workers and many tools to produce output).

85
Q

Does the size (scale) of the operation influence the cost of production?

A

Yes. The bigger your operation gets, the higher the costs could get or the lower the costs could get. It affects profit.

86
Q

When will a firm maximize its profits by producing at the level of output where marginal cost equals price and marginal cost is increasing?

A

Always. In both the long run and short run.

87
Q

In the short run:

A

Scale is fixed. You can only change labor.

88
Q

The long run and the short run:

A

Do not refer to a specific amount of time, you just look at what you can accomplish in that period of time to figure out if it is LR or SR.

89
Q

***What is total revenue?

A

The price of a good or service multiplied by the quantity sold.

90
Q

Curve of a Total Revenue graph:

A

Is not curved. It is called a ‘smooth’ curve.

91
Q

Total Revenue Curve shows you:

A

That for any given quantity of the product sold in a period, how much total revenue the firm earns.

92
Q

Slope of the TR curve:

A

Rise over the run. Slope of TR = the price of the product.

93
Q

***What is Market Power?

A

The ability of a firm or a group of firms in a specific market to influence the price and quantity produced of a product.

94
Q

What is one way you know that a firm has market power?

A

If it can raise the price of the product without losing all its customers to a competitor.

95
Q

What is the second way you know that a firm has market power?

A

If it can lower the price of the product without attracting the entire market.

96
Q

What determines whether or not a firm has market power?

A

It depends on how large the firm is relative to the customers.

97
Q

What is perfect competition?

A

A market is said to be in perfect competition if it is characterized by a large number of small firms selling identical goods and there are no barriers to entry. Perfectly competitive firms are price-takers.

98
Q

In Perfect Competition:

A

The output of a single firm is small relative to the market demand; the market wants to buy a lot more than one firm can produce.

99
Q

In Perfect Competition continued:

A

All firms sell identical products and customers do not distinguish between products.

100
Q

What does it matter that competitors produce an identical product?

A

It matters because when customers care about the color, shape, texture, etc., of a product, they may be willing to pay a slightly higher price for a product that looks better.

101
Q

What is the pricing like when there are a lot of competitors in the market?

A

There isn’t a lot of moving room for prices when competitors produce identical products. They all have to stick to a specific price range.

102
Q

In Perfect Competition continued 2:

A

There are no barriers to entry. Any firm can enter and exit whenever it would like.

103
Q

Firm and Market demand in Perfect Competition:

A

Market supply and demand determine the equilibrium price for the product. Firms take price as given.

104
Q

Firm and Market demand in Perfect Competition continued:

A

If they raise their price they will lose all customers to competitors. Why charge a lower price when they can sell all they produce at market price?

105
Q

An Individual Firm’s Demand says:

A

At the going price, P*, a firm can sell as much output as it wants. The individual demand curve of a perfectly competitive firm is a horizontal line at the market price.

ECON 2106 (5 decks)

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