Econ: Chapter 6

How is producer surplus calculated?

0.5×(Base of triangle×Height of triangle)

What is a shutdown?

A short-run decision to not produce anything during a specific time period.

-Total Cost-The sum of variable and fixed costs. -Variable Cost-Costs associated with variable factors of production;these are costs associated with workers and therefore change with the level of production in the short run. -Fixed Cost-A cost associated with a fixed factor of production, such as structures or equipment, and therefore does not change with production in the short run.

Cost of Production

The change in total revenue associated with producing one more unit of output.

Marginal Revenue

What do zero economic profits mean?

They are making just as much in the business than they could in any other business.

How are profits calculated?

Total revenue subtracted by total cost.

The elasticity is equal to 1: a 1 percent change in price leads to a 1 percent change in quantity supplied.

Unit-Elastic

How is marginal revenue calculated?

q=quantity

How is the long-run calculated?

(P−ATC)×Q

What is the difference between short-run and long-run?

-In the short run, if it wants to change production, it can only do so by hiring or laying off workers. This is because only labor is variable in the short run. -In the long run, however, The Cheeseman searches for the optimal combination of workers and building size (physical capital). -The Cheeseman is able to combine workers and physical capital to achieve the minimal ATC for each output level. -This difference causes the short-run cost curves to be above the long-run cost curve. -Even though the number of firms in the industry is fixed in the short run, in the long run, firms can enter or exit the industry in response to changes in profitability. -This is because in the long run, they have the ability to change both labor and physical capital.

What are the three elements of the seller's problem?

-Making the goods. -The cost of doing business. -The rewards of doing business.

What are economies of scale?

-The long-run ATC curve has a pronounced U-shape. -On the downward portion of the U, ATC decreases as output increases. Over this range, economies of scale exist. -When ATC does not change with the level of output, the plant experiences constant returns to scale. -Diseconomies of scale occur when ATC increases as output rises.

The size of supply elasticities is determined by what several factors?

-Whether the firm has excess inventories. -How long the firm has to respond to price changes is important. -If workers are readily available, then supply will be more elastic because the firm can respond to price increases by quickly hiring workers.

Equal to revenues minus explicit costs. -Explicit Costs-A direct payment made to others in the course of running a business, such as wage, rent and materials, -Explicit costs are the sorts of line-item expenditures that accountants carefully tally and report, like wages for workers or equipment expenditures.

Accounting Profits

Total cost divided by total output. -This also goes for variable and fixed costs.

Average of Total Cost

How is total cost calculated?

Average total cost multiplied by quantity.

Why is the MR=MC rule powerful?

By linking the market price to the MC curve, we can determine in the short run how a competitive firm changes its output when the market price changes. -That is, it permits us to describe the firm's supply curve, which relates output to prices. -By producing to where MR equals MC​, the seller is maximizing any existing profit or minimizing any existing loss. -To determine profit or​ loss, left parenthesis Upper P minus ATC right parenthesis Upper Q must be used.

Equal to total revenue minus both explicit and implicit costs. -Implicit Costs- Any cost that has already occurred but is not necessarily shown or reported as a separate expense. -It represents an opportunity cost that arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources.

Economic Profits

Quantity supplied is quite responsive to price changes. -Any given percentage change in price leads to a larger percentage change in quantity supplied (elasticity greater than 1). -The steeper the supply curve is, the less sensitive quantity supplied will be to price changes.

Elastic Supply

Any given percentage change in price causes a smaller percentage change in quantity supplied (elasticity less than 1).

Inelastic Supply

A certain point of successive increases in inputs, marginal product begins to decrease. -With a set amount of physical capital, successive increases in labor eventually lead to lower output per worker because there is idle time—workers cannot use the machines as often as they would like. -Adding too many workers can actually decrease overall production.

Law of Diminishing Returns

Defined as a period of time wherein a firm can change any input. -This means that physical capital is a fixed factor of production (an input that cannot change in the short run). -Price will be driven to the minimum ATC. -Note that the marginal cost curve intersects the ATC curve at its​ minimum, marginal cost will equal the minimum ATC​

Long Run

When is MR>MC, vice versa?

MR > MC-The firm is producing too little and can increase profit by increasing output. MR < MC-The firm is producing too much and can increase profit by decreasing output.

The change in total cost associated with producing one more unit of output. -Change in total cost divided by change in output. -This and marginal product are inversely related to one another. As one increases, the other automatically decreases. -As long as it is less than ATC​ (whether decreasing or​ increasing), the ATC is declining. When it exceeds​ ATC, the ATC is rising. -Since the curve represents the change in total cost relative to a change in​ output, it reflects the directions of the ATC and AVC curves and intersects each of those curves at its respective minimum.

Marginal Cost

-No buyer or seller is big enough to influence the market price. -Sellers in the market produce identical goods. -There is free entry and exit in the market.

Perfectly Competitive Market

How are total profits calculated?

Price×Q−ATC×Q=(Price−ATC)×Q. Marginal Cost=Marginal Revenue -At this level of production, we know that this choice optimizes profits and represents the equilibrium.

Computed by taking the difference between the market price and the MC curve. -The difference between the price and the sellers' reservation values (marginal cost). -Graphically, producer surplus is the area above the MC curve and below the equilibrium price line. -In this way, it is distinct from economic profits because economic profits include a consideration of total cost, not just MC. -a consumer's surplus arises from being willing to pay above the market price, a producer's surplus arises from selling units at a price that is above MC. -we can add up sellers' producer surplus to obtain the total producer surplus in the market. We do this by measuring the area above the MC curve that is below the equilibrium price line to compute producer surplus for the entire market.

Producer Surplus

The relationship between the quantity of inputs used and the quantity of outputs produced. -Physical Capital-Any good, including machines and buildings, used for production.

Production Function

A period of time when only some of a firm's inputs can be varied. -Labor is a variable factor of production. -A fixed factor of production is an input that cannot be changed, such as a sewing machine. -A variable factor of production is an input that can be changed, such as labor. -Marginal product-The change in total output associated with using one more unit of input.

Short Run

A special type of cost that, once they have been committed, can never be recovered. -Once they are committed, they shouldn't affect current or future production decisions. -The reason for this is simple: these costs are sunk. -That is, lost, regardless of what action is chosen next—they can't affect the relative costs and benefits of current and future production decisions.

Sunk Costs

What is the goal of a business?

The goal of the seller is to maximize net​ benefits, or profits. -This may or may not occur when​ revenues, margins, or units sold are maximized.

How is price elasticity of supply calculated?

The measure of how responsive quantity supplied is to price changes. -The price elasticity of supply will tend to be positive, because as price increases, firms tend to increase their quantity supplied.

Profit is less than zero which leads to an exit and the number of firms goes down.

The occurrence of an exist

How is average revenue (price) calculated?

total revenue divided by output -The​ profit-maximizing output is obtained by setting marginal cost equal to price.

How is revenue calculated?

yup