ECO 203 Quiz 6

When the total product function begins to increase at a decreasing​ rate

-The law of diminishing returns has set in. -Marginal product is falling. -Marginal cost is rising.

Short-Run Industry Supply Curve

The horizontal sum of the firms' marginal cost curves above their levels of average variable cost.

Define marginal product

The increase in total product that results from a one-unit increase in the quantity of labor employed, with all other imputs remaining the same.

Why does the marginal product of labor eventually decline as more labor is used with another fixed​ input

The labor will​ have, on​ average, fewer units of the other inputs to combine with and the increases to total output obtained from more labor will decrease.

The shape of the​ short-run cost curves are the result of

The law of diminishing returns

Why is the long run average total cost curve generally considered to be a U shaped curve?

The long run average total cost curve is generally considered to be U shaped bc initially there are economies of scale, and for large amounts of production, there are diseconomies of scale

In​ economics, the planning horizon is defined as

The long​ run, during which all inputs are variable.

Define total product

The maximum output that a given quantity of labor can produce.

Shut-down point

The output and price at which the firm just covers its total variable cost. In the short run, the firm is indifferent between producing the profit-maximizing output and shutting down temporarily.

Define sunk cost

The past expenditure on a plant that has no resale value

Short-run Cost

The period of time in which the quantity of at least one factor of production is fixed and the quantities of the other factors can be varied. The fixed factor is usually capital- that is, the firm has a given plant size.

In a perfect competition what is a firms short-run supply curve?

The section of the marginal cost curve above the shutdown point or average variable cost curve.

Why is the short-run average cost curve a U-shaped curve?

The short run average cost curve initially slopes downward bc of increasing marginal productivity and large average fixed costs, then begins sloping upward bc of diminishing marginal productivity, giving it a U-shape

The production function

-Specifies the maximum possible output that can be produced with a given amount of inputs. -Depends on the technology available to the firm. -Specifies the minimum amount of inputs necessary to produce a given level of output.

Marginal Revenue Curve

(Horizontal) A curve that graphically represents the relation between the marginal revenue received by a firm for selling its output and the quantity of output sold. A firm maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve. The marginal revenue curve for a firm with no market control is horizontal. The marginal revenue curve for a firm with market control is negatively sloped and lies below the average revenue curve.

Averagte Total Cost Curve

(U shaped) A curve that graphically represents the relation between average total cost incurred by a firm in the short-run product of a good or service and the quantity produced. The average total cost curve is constructed to capture the relation between average total cost and the level of output, holding other variables, like technology and resource prices, constant. The average total cost curve is one of three average curves. The other two are average variable cost curve and average fixed cost curve. A related curve is the marginal cost curve.

Diminishing Marginal Productivity v. Diseconomies of Scale

-Diminishing Marginal Productivity: the decline in productivity caused by increasing units of a variable input being added to a fixed input -Diseconomies of Scale: decreases in productivity that occur when there are equal percentage increases of all input (no input is fixed)

The Shape of the Long Run Cost Curve

-Is due to the existence of economies of scale and diseconomies of scale -Law of diminishing marginal productivity doesn't apply to the long run since all inputs are variable in the long run

Marginal Cost Curve

A curve that graphically represents the relation between the marginal cost incurred by a firm in the short-run product of a good or service and the quantity of output produced. This curve is constructed to capture the relation between marginal cost and the level of output, holding other variables like technology and resource prices constant.

Why does China use production techniques that require more workers per acre of land than does the US?

Because the price of labor is much lower in China relative to the US. Both countries are producing economically efficiently

Why is the role of the entrepreneur central to the production process in the economy?

Economic activity does not just happen. Some dynamic, driven individual must instigate production--an entrepreneur

As the owner of the firm, Jim pays himself $1000. All other expenses of the firm add up to $2000. What would an economist say are the total costs for Jim's firm?

He doesn't know what total cost is without knowing what Jim could have earned if he had undertaken another activity besides running his running. Just bc he paid himself $1000 doesn't mean that $1000 is his OC

What happens in the long run if firms in a perfectly competitive industry are making economic losses?

If firms are making loses then some firms will exit the industry. This will cause market supply to decrease and the equilibrium price to rise. This will continue until profit levels for the surviving firms are at normal levels.

The law of diminishing marginal returns shows the relationship between

Inputs and output for a firm in the short run

Economic loss

Is a term of art which refers to financial loss and damage suffered by a person such as can be seen only on a balance sheet rather than as physical injury to the person or destruction of property.

Define long run

Is a time frame in which the quantities of all factors of production can be varied. That is, the long run is a period in which the firm can change its plant.

Define short run

Is a time frame in which the quantity of at least one factor of production is fixed. For most firms, capital, land and entrepreneurship are fixed factors of production and labor is the variable factors of production.

Average product

Is equal to total product divided by the quantity of labor employed.

Loss minimization

Is one of three short-run production alternatives facing a firm. With profit maximization price exceeds average total cost at the quantity that equates marginal revenue and marginal cost.

Breakeven point:

Is the production level where total revenues equal total expenses. In other words, the break even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period.

Why are larger production runs often often cheaper than smaller production runs?

Larger production runs are generally cheaper per unit than smaller production runs because of indivisible setup costs, which do not vary with the size of the run

When marginal cost is falling

Marginal Product must be rising

How do you calculate maximum profit?

Profit is maximized at the quantity of output where marginal revenue=marginal cost.

When marginal costs are greater than average​ costs, average costs must

Rise

Economies of scale

The cost advantage that arises with increased output of a product. They arise because of the inverse relationship between the quantity produced and per-unit fixed costs

Economic profit

The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used when calculating economic profit, opportunity cost are deducted from revenues earned.

True or False: If a process is economically efficient, it is also technically efficient.

True. Since an economically efficient method of production is that method that produces a given level of output at the lowest possible cost, it also must use as few inputs as possible. It is also technically efficient

The long run is any time period where

all inputs can be changed

If total product is increasing at a decreasing​ rate, then marginal product is

decreasing