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Test 3 Microeconomics-AlHmoud


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Long run
when none of the factors of production are fixed
short run
when at least 1 factor of production is fixed
What are the factors of production?
Labor, Land, Capital, and Entrepreneurship/Management
What factors of production are the most/least likely to change?
Most: Labor
Least: Capital
When referring to the production function, what do Q, L, & K stand for?
Q = Total output (product)
L = Labor
K = Capital

what is the production function?
(Q = y axis) (L,K = x axis) What happens to MPL as Labor increases?
MPL increases at first and then decreases
What is the slope of MPL?
(delta Q)/(delta L)
Define Marginal Product of Labor?
The additional contribution of the nth worker.
What is the slope of the production function?
What is the formula for the Average Product of Labor?
What happens if the MPL is greater or less than the APL?
The APL gravitates towards the MPL (greater, up), (lower, down)
What are examples of variable costs for a restaurant?
Deliveries, Raw Materials, Labor, Advertising, and Management
What are some examples of Fixed Costs for a restaurant?
Interest on Loans, Utilities, Rent, Permits, Insurance, and Taxes
Total Cost consists of
Fixed Costs + Variable Cost
When referring to costs, how do they compare to financial/accounting costs?
Economic cost, even when Revenue = 0, the firm is still making a profit?
What is explicit cost?
Direct costs such as invoices, etc.
What are implicit costs?
opportunity costs, hard to track down specifically
How does economic profit compare to accounting profit?
Accounting profit will always be higher because economic cost includes implicit cost
What is the formula for Marginal Cost?
(change Total Cost)/(change Quantity)
Where does MC intersect ATC and AVC?
At the lowest point on both curves
Why does ATC and AVC increase after they intersect with MC?
Because after MC crosses both curves, it drags both curves up with it.
Does fixed cost change?
No, only AFC changes
Why does the ATC curve in the short run have a "u" shape?
Average fixed cost and marginal product of labor is decreasing as production increases, causing ATC to decrease and then increase. As MPL decreases, MC increases.
What is the law of diminishing marginal product of labor?
Red Raider and chalkboard example - why MC decreases and then increases.
What is the law of diminishing returns?
when adding more of a variable input, such as labor to the same amount of a fixed input, such as capital, will eventually cause the marginal product of the variable input to decline.
How long will ATC increase in the short run?
ATC will increase until we move to a different scale of operation.
What is the shape of the Long Run Average Cost Curve?
"U" shaped
Why does the LRAC curve have a "U" shape?
When decreasing, the firm is experiencing economies of scale or increasing returns to scale. When increasing, the firm is experiencing diseconomies of scale or decreasing returns to scale.
When the LRAC is lowest, the firm is experiencing constant returns to scale
What causes diseconomies of scale?
huge expansions which lead to great increases in cost to management, marketing, coordination, etc. They become too large to function efficiently.
Where is the lowest cost per unit on the LRAC?
where the firm is experiencing constant returns to scale (or the efficient scale) or minimum efficient scale. Where LRAC is flat.
How large is the minimum efficient scale?
aka CRTS, it varies
What do companies do when they have fully utilized economies of scale and constant returns to scale?
They merge with newer companies that are still becoming more efficient.
All test material is based in what kind of market?
Perfectly Competitive Market
What are the two types of market extremes?
Perfectly Competitive Market (textbook only) or a Monopoly
What is a monopolystically competitive market?
Monopolistic in that only one firm can produce under a name brand, but each company still competes with other companies that produce similar products.
The majority of markets are?
Monopolystically competitive
What are homogenous products?
products that are indistinguishably the same
Perfectly competitive market
A market with an infinite number of firms with homogenous product
Monopolistically Competitive Market
A market where products are similar, but differentiated, there are several forms
A market with few firms, and very distinguishable products. Such as car manufacturers (only 3 in the US)
A market where only 2 firms exist, they can make the price. Example: Lubbock electricity suppliers
A market where only 1 firm exists
What things define a perfectly competitive market?
There are tons of firms and buyers, There are zero barriers to entry or exit, Information is symmetrical, and the Market share of every firm is very small
How do you calculate Marginal Revenue in a perfectly competitive market?
change in total revenue/change in quantity
In a perfectly competitive market, how are demand, price, and Marginal Revenue related?
Demand = Price = MR
Who sets the price in a perfectly competitive market?
The market
What is economic profit in a perfectly competitive market at the equillibrium price?
0 economic profit
Profit is maximized where (graph view)
the slope of the total cost curve is equal to the slope of the total revenue curve
What is the golden rule?
MC = MR or TC = TR
What do the curves look like when MR and MC are graphed together?
MR is perfectly horizontal and the MC curve decreases at first and then increases
Firms will continue to produce more until
marginal cost = marginal revenue
What markets do the golden rule apply to?
All markets
What is the golden rule in a market with perfect competition?
P = MC
How do you calculate profit?
Total revenue - Total cost
If producers are bringing in negative profit, is it best to quit producing?
No, in the short run continue to produce as long as fixed costs are covered as well as any amount of variable costs.
Increasing cost industry
any industry that depends on finite resource or a limited pool of skilled workers, which when more firms enter, factors of production increase
Constant Cost Industry
such as cotton, retail, services, etc are flat
Decreasing cost industry
Any industry with technological parts, as more firms enter, costs of factors of productions decrease

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