Diseconomies of Scale/ Perfect Competition

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Golden Rule of Profit Maximization:

To maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equals marginal cost; this rule holds for all market structures.

Average Revenue:

Total revenue divided by output, or AR=TR/q; in all market structures, average revenue equals the market price.

Isoquant Curve:

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output.

Diseconomies of Scale:

Forces that may eventually increase a firm's average cost as the scale of operation increases in the long run. [At the Movies]

Isocost Line:

Identifies all combinations of capital and labor the firm can hire for a given total cost.

Expansion Path:

The Line formed by connecting tangency points. P 164. Isoquants

Properties of Isoquants:

1. Isoquants father from the origin represent greater output rates. 2. Isoquants have negative slopes because along a given Isoquant, the quantity of labor employed inversely relates to the quantity of capital employed. 3. Isoquants do not intersect because each isoquant refers to a specific rate of output. 4. Isoquants are usually convex to the origin.

Constant Long-Run Average Cost

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size. [Billions and Billions of Burgers] (McRib, at McDonalds is only a special in Cincy but Constant in the south throughout the year)

Short-Run Industry Supply Curve:

A curve that indicates the quantity supplied by the industry at each price in the short run; in perfect competition, the horizontal sum of each firm's short-run supply curve.

Short-Run Firm Supply Curve:

A curve that shows the quantity a firm supplies at each price in the short run; in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

Long-Run Industry Supply Curve:

A curve that shows the relationship between price and quantity supplied by the industry once firms adjust fully to any change in market demand.

Price Taker:

A firm that aces a given market price and whose quantity supplied has no effect on that price; a perfectly competitive firm.

Perfect Competition:

A market structure with many fully informed buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

Commodity:

A standardized product, a product that does not differ across producers, such as bushels of wheat or an ounce of gold.

Constant-Cost Industry:

AN industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal.

Isoquant Lines

All combinations of capital and labor a firm can hire for a given total cost Are parallel - reflect the same relative resource prices

Increasing-Cost Industry:

An increasing that faces higher per-unit production. Costs as industry output expands in the long run; the long run industry supply curve slopes upward.

Expansion path

Connect the tangency points between isoquants and isocost lines Least-cost input combinations for producing several output rates

Production Function:

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology. [The PF can be presented as an equation, a graph, or a table]

Market Structure

Important features of a market, such as the number of firms, product uniformity across firms, firms' ease of entry and exit, and forms of competition

Marginal Rate of Technical Substitution (MRTS):

The Rate at which labor substitutes for capital without affecting output.

Marginal Revenue:

The change in total revenue from selling an additional unit; in perfect competition, marginal revenue is also the market price.


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