Micro Exam 3

Constant Returns to Scale

A condition in which the long-run average cost of production remains constant as production increases.

Economies of Scale

A condition in which the long-run average total cost of production decreases as production increases.

Diseconomies of Scale

A condition in which the long-run average total cost of production increases as production increases

Short-Run Average Total Cost Curve (ATC)

A curve showing the average total cost for different levels of output when at least one input production is fixed, typically plant capacity.

Long-Run Average Total Cost Curve (LRATC)

A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable.

Variable Costs

Costs that change with the amount of output produced, increasing as production increases and decreasing as production decreases.

Fixed Costs

Costs that do not change with the amount of output produced.

Profit-Maximizing Rule

MR=MC

Explicit Costs

Monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as accounting costs.

Productive Efficiency

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

Allocative Efficiency

Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.

Monopoly Power

The ability of a monopoly to dictate what takes place in a given market.

Marginal Cost (MC)

The additional cost associated with one more unit of an activity. For production, it is the change in total cost due to the production of one more unit of output. When a car factory increases production from 100 to 101 cars, the firm's total cost increases by $15000 which is the marginal cost of producing the additional car. Marginal Cost (MC) = Change in Total Cost (TC) / Change in Output (Q)

Marginal Product (MP)

The additional output produced as a result of utilizing one more unit of a variable resource (i.e., labor or capital). Marginal Product (MP) = Change in Total Product (TP)/Change in Variable Resource

Average Product (AP)

The average amount of output produced per unit of a resource employed; total product divided by the number of units of a resource employed. Average Product (AP) = Total Product (TP)/Units of Resource

Marginal Revenue (MR)

The change in a firm's total revenue that results from a one-unit change in output produced and sold. MR = Change in TR / Change in Q (TR = P x Q)

Economic Costs

The costs associated with the use of resources; the sum of explicit and implicit costs Economic Costs = Explicit Costs - Implicit Costs

Total Revenue (TR)

Total Revenue (TR) = Price x Quantity = P x Q

Average Total Cost (ATC)

Total cost (TC) divided by the amount of output produced; total cost per unit. Average Total Cost (ATC) = Total Cost (TC) / Output (Q) ATC = AFC + AVC

Average Fixed Cost (AFC)

Total fixed cost (TFC) divided by the amount of output produced; fixed per unit. Average Fixed Cost (AFC) = Total Fixed Cost (TFC) / Output (Q)

Economic Profit (as Measure)

Total revenue minus economic costs, which include both explicit and implicit costs of production. Economic Profit = Total Revenue (TR) - Economic Costs

Accounting Profit

Total revenue minus the explicit costs of production. Accounting Profit = Total Revenue (TR) - Explicit Costs

Average Variable Cost (AVC)

Total variable cost (TVC) divided by the amount of output produced; variable cost per unit. Average Variable Cost (AVC) = Total Variable Cost (TVC) / Output (Q)

Increasing Marginal Returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than that of the previous variable resource.

Diminishing Marginal Returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource

Barriers to Entry

any impediments that prevent firms from entering a market or industry

Monopoly

market structure characterized by a single producer; form of imperfect competition

Normal Profit

The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.

Economic Costs

The costs associated with the use of resources; the sum of explicit and implicit costs. Economic Costs = Explicit Costs + Implicit Costs

Economic Profit

The level of profit that occurs when total revenue is greater than total cost.

Loss

The level of profit that occurs when total revenue is less than total cost.

Minimum Efficiency Scale

The lowest level of output at which the long-run average total cost is minimized.

Implicit Costs

The opportunity costs of using owned resources; costs for which no monetary payment explicitly made.

Total Cost (TC)

The sum of fixed and variable costs of production. Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC) TC = TFC + TVC

Long Run

The time period in which all inputs can be changed.

Short Run

The time period in which at least one input of production is fixed but other inputs can be changed

Total Product (TP)

The total amount of output produced with a given amount of resources. Total Product (TP) = Total Output

Deadweight Loss

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium.