Economics Test 3
Terms
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- A Firm
- an organization commbining land labor and capital to produce a product or a service, hopefully for profit if the organization is a private for profit company
- Explicit Costs
-
"Out of POcket" expenses that MUST be paid
Ex: Wages, rent, taxes - Accounting Profits
- = Total Revenue- Explicit Coasts
- Implicit Costs
-
Expenses that are NOT out of pocket and are frequently not calculated by managers
Ex: opportunity cost of labor and the opportunity cost of capital - Opportunity Cost of Capital
- Availab;e reutrn ont he next best project, economists consider this as a production cost
- Opportunity Cost Of Labor
- Possible earnings fromt eh next best job, economists consider this as a production cost
- Economic Profit
-
= Total Revenue-Explicit-Implicit costs
Accounting Profits-Implicit Costs - The Goal of a firm is to
- Max Profits
- TIme period where at least one factor of production is fixed is
- Short Run
- The time period where no inputs in a production process are fixed is
- Long Run
- When Marginal Product of labor increases intially
-
1. Workers can specilize in certian tasks
2. Learning by doing may be relevant - MPl (Marginal Product of labor)
-
Change in Total Product(Q)/
Change in labor - The Law of Diminishing Marginal Productivity
- When adding addititonal units of a variable input (i.e labor) holding all other inputs fixed (I.e capital) a point exists beyond which the additional output resulting form each additional input will decrease
-
In the Short Run
Total Fixed Costs - Don't change with output
-
In the Short Run
Total variable costs - do change with output
- Total Costs
- = TFC+ TVC
- Average FIxed COst
- = TFC/Q
- Average Variable Costs
- TVC/Q
- Average total costs
- TC/Q
- MArginal COst
-
Change in total cost due to an increase in output in the production process
MC= change in TC/ change in Q - In the long run, all cost are
-
Variable
becuase FC=0 in the LR - WHen the LRAC curve is decreasing as quantity is increaseing, the firm is experiencing
- Economies of Scale- reasons- specialization or resources,
- When the LRAC curve is increasing, the firm is experiencing
- diseconomies of scale- reason: difficult to manage a very large scale operation
- Production decisions ignore
- Sunk costs- fixed costs incurred in the past
- Produce as long as MR is
- Greater than or equal to MC
- If MC intersects MR at more than one output level,
- we can compare profits at each output level where MR=MC to determine the profit-maximizinf quantity where profit=TR-TC
- Firms will not produce in the short run id
- Price is less than AVC
- Firms will not produce in the long run if
- they are earning negative economic profits
- Assumptions or conditions of perfect competition
-
1. Many Buyers and sellers
2. Perfect information about prices and other factos
3. Undifferentiated products or homogeneous products
4. No barriers to entry or exit - IN the short run the profit maximizing quantity is
- the quanitity where MR=MC
- P=MC
- only for perfect competition
- At the profit maximizing quantity a firm will produce in the short-run if
- Price is greater than or equal to AVC
- SOme firms say that they cannot afford to go out of business despite the fact that they are losing money
- The reason is tprobably because the selling price is greater than average variable cost of firms that also have fixed cost. If P is greater then AVC then the firm shoudl produce a = quantity, at least in the SR
- Economic Profit=
-
Profit Maximization= TR-TC
= (P-AVC)*Q-TFC - shutdown point
- at a lower price the firm would not produce in the short run becuase price would be less than AVC
-
a perfectly competitive firm
is a - Price taker because they have no influence on price
- P<AVC
- Exit in the short run, (In this case P <ATC also)
- P>AVC but P<ATC
-
produce in the short run, some firms exit in long run
Fewer firms means that industry supply curve shifts inward
Prices rise, market quantity falls, individual firms quantity rised - P=ATC
- this is long run equilibrium in perfect competition with zero economic profit. No firm has an incetive to enter or exit the industryk
- P>ATC
- these profits attract new firms, entry shirts the supply cure to the reight resulting in loweer prices and greater quantities for the market. Each individual firm's quantity will however decrease
- Monoploy
- Means "one seller"= Opposite end of the market power spectrum when compared with perfect competition
- one seller-
- market demand is the monopolists demand
- why is MR under the demand curve
- to sell an sddition unit the monopolist must lower the price to all consumers to sell an extra unit of output
- you are
- Beautiful
- You will
- Get There