Microeconomics Module 4 Quiz

Shutdown vs Exit

A shutdown is a short-run decision not to produce anything because of market conditions. *still must pay FC if done in short-run An Exit is a long-run decision to leave the market *no costs if done in long-run

The Short Run Supply Curve

the portion of the MC curve above the AVC curve -if P > AVC, produce Q where P = MC -if P < AVC, shutdown

Average Total Cost (ATC)

total costs (TC) divided by quantity of output (Q) -AVC+AFC = ATC

economic profit

total revenue minus total cost, including both explicit and implicit costs

Accounting profit

total revenue minus total explicit cost

Average Variable Cost (AVC)

variable costs (VC) divided by quantity of output (Q)

The Decision to Shutdown (Short-run)

-Cost of shutting down: revenue loss = TR -Benefit of shutting down: cost savings = VC *shut down if TR < VC aka shut down if P < AVC

Market Supply: Assumptions

1) All existing firms and potential entrants have identical costs. 2) Each firm's costs do not change as other firms enter or exit the market. 3) The number of firms in the market is fixed in the short run (due to fixed costs) and variable in the long run (due to free entry and exit)

ATC in relation to the Scales of Production

1). Economies of scale: ATC falls as Q increases 2). Constant Returns to scale: ATC stays the same as Q increases 3). Diseconomies of scale: ATC rises as Q increases

Costs in the Short Run vs the Long Run

1). In the short run, some inputs are fixed (FC), whereas all the inputs in the long run are variable (VC). 2). In the long run, ATC at any Q is cost per unit using the most efficient mix of inputs for that Q

Characteristics of a Perfect Competition

1). Many buyers and many sellers 2). the goods offered are largely the same -because of these, each buyer and seller is a price taker (takes the price as given) 3). firms can freely enter or exit the market

Revenue of a Competitive Firm

1). Total Revenue: TR= Price x Quantity 2). Average Revenue: AR = TR/Q = P 3). Marginal Revenue: the change in TR from selling one more unit (MR = ∆TR/∆Q)

Relationship between ATC and MC

1). When MC is less than ATC, that means ATC is falling 2). When MC is greater than ATC, that means ATC is rising 3). The MC curve crosses the ATC curve at the ATC curve's minimum

Characteristics of ATC

1). usually a "U" shape 2). As Q rises, initially falling AFC pulls it down but then rising AVC pulls it back up 3). Efficient Scale: the quantity that minimizes ATC (lowest point that still works)

Why MR = P for a Competitive Firm

A competitive firm can keep increasing its output without affecting the market price. -Each one-unit increase in Q causes revenue to rise by P (=MR) *ONLY TRUE for competitive markets

fixed costs

Costs that do not vary with the quantity of output produced -ex; cost of equipment

Entry and Exit in the Long Run

If existing firms earn positive economic profit: • New firms enter, SR market supply shifts right • P falls, reducing profits and slowing entry If existing firms incur losses: • Some firms exit, SR market supply shifts left • P rises, reducing remaining firms' losses

Profit Maximization

If you increase Q by one unit, revenue raises by P (or MR), and cost rises by MC. -If MR > MC, increasing Q will increase profit -If MR < MC, decreasing Q will increase profit -When MR = MC, the profit is maximized at that Q

LR Market Supply Curve (Slope edition)

The curve is horizontal if 1). all firms have identical costs 2). costs do not change as other firms enter or exit -if it doesnt meet these standards, it curves upward

Marginal Product of Labor (MPL)

change in output/change in labor -∆Q/∆L -equals the slope of the prod function -diminishes as L (labor) increases

Long Run Decision to Exit

cost of exiting: revenue loss (TR) benefit of exiting: cost savings (TC) *exit if TR < TC aka if P < ATC ** Enter the market if TR > TC aka if P >ATC

variable costs

costs that vary with the quantity of output produced -ex; wages

Average Fixed Cost (AFC)

fixed cost (FC) divided by the quantity of output (Q)

The Zero-Profit Condition

occurs when P = MC = ATC which means when P = the minimum ATC

Explicit Costs

out of pocket costs -ex: interest on a loan, rent, supplies, etc

Long Run Supply Curve

portion of its MC curve above the LRATC curve

Production Function

shows the relationship between the quantity of inputs used to produce a good and the quantity of outputs produced of that good -can be represented by a table, equation, or graph

Irrelevance of Sunk Costs

sunk costs are costs that have already been committed and cannot be recovered -ex: fixed costs -should not be a factor in decisions

MC and Supply

the MC curve determines the firm's Q at any price, which means the MC curve is the firm's supply curve

Total Revenue

the amount a firm receives from the sale of its output

Marginal product of any input

the increase in output arising from an additional unit of that input, holding all other inputs constant

Diminishing Marginal Product

the marginal product of an input declines as the quantity (Q) of the input increases

Total Cost

the market value of the inputs a firm uses in production

implicit costs

the opportunity costs of the resources supplied by the firm's owners