Micro: Top Ten List Chapter 8

Understand Figure 8.2, page 196.

Average fixed cost is simply fixed cost divided by the quantity of output. -As output increases, average fixed cost declines because we are dividing a fixed number ($1,000) by a larger and larger quantity

Understand Figure 8.6, page 174

Rising marginal cost intersects average variable cost at the minimum point of AVC

What is marginal revenue (MR)?

The additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition, P=MR

What is marginal cost (MC)?

The increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs.

What is the logic behind the profit-maximizing competitive firm rule?

The key idea here is that firms will produce as long as marginal revenue exceeds marginal costs

What is average fixed cost (AFC)?

Total fixed cost divided by the number of units of output; a pre-unit measure of fixed costs (AFC=TFC/q)

What is total cost (TC)?

Total fixed costs plus total variable costs (TC=TFC+TVC)

What is the relationship between average total cost and marginal cost?

When marginal cost is below average cost, average cost is declining. When marginal cost is above average cost, average cost is increasing.

What is average total cost (ATC)?

The total cost divided by the number of units of outputs (ATC=TC/q)

Understand Figure 8.7, page 175

Adding TFC to TVC means adding the same amount of total fixed cost to every level of total variable cost. Thus, the total cost curve has the same shape as the total variable cost curve; it is simply higher by an amount equal to TFC.

Why does the law of diminishing returns imply that marginal cost must eventually rise with output?

In the short run, every firm is constrained by some fixed input that: 1) leads to diminishing returns to variable inputs and 2) limits its capacity to produce. As a firm approaches that capacity, it becomes increasingly costly to produce successively higher levels of output. Marginal costs ultimately increase with output in the short run

What is total variable cost (TVC)?

The total of all costs that vary with output in the short run

What is average variable cost (AVC)?

The total variable cost divided by the number of units of output (AVC=TVC/q)

What are variable costs?

A cost that depends on the level of production chosen

What are fixed costs?

Any cost that does not depend on the firms' level of output. -These costs are incurred even if the firm is producing nothing. -There are no fixed costs in the long run

How do you calculate marginal cost from total variable cost? Understand Table 8.3, page 171.

Marginal cost is derived from total variable cost by simple subtraction

What does the marginal revenue curve facing a competitive firm look like?

The marginal revenue curve and the demand curve facing a competitive firm are identical. The horizontal line in Figure 8.9(b) can be thought of as both the demand curve facing the firm and its marginal revenue curve

How does the profit-maximizing competitive firm find the most profitable level of output?

The profit-maximizing competitive firm will produce up to the point where the price of its output is just equal to short-run marginal cost (P=MC)

When a firm sells its output in a perfectly competitive market, what does the demand curve for its output look like? Understand Figure 8.9, page 179. Why does it look like this?

If a representative firm in a perfectly competitive market raises the price of its output above $6.00, the quantity demanded of that firm's output will drop to zero. Each firm faces a perfectly elastic demand curve, d.

Understand Figure 8.10, page 181

If price is above marginal costs, as it is at 100 and 250 units of output, profits can be increased by raising output; each additional unit increases revenues by more than it costs to produce the additional output. Beyond q*=300, however, added output will reduce profits. At 340 units of output, an additional unit of output costs more to produce than it will bring in revenue when sold on the market. Profit-maximizing output is thus q*, the point at which P*=MC

What is the relationship between the firm's marginal cost curve and its short-run supply curve?

Marginal cost curve relates price and quantity supplied. At any market price the marginal cost curve shows the output level that maximized profit. A curve that shows how much output a profit-maximizing firm will produce at every price is a supply curve Thus, the marginal cost curve of a competitive firm is the firms' short-run supply curve. See Figure 8.11, page 184

Understand Figure 8.8, page 176

To get average total cost, we add average fixed costs and average variable costs at all levels of output. Because average fixed cost falls with output, an ever-declining amount is added to AVC. Thus, AVC and ATC get closer together as output increases, but the two lines never meet.

How do fixed costs and average fixed cost vary in response to changes in the level of output?

Total Fixed Cost: do not change with output even if output is zero Average Fixed Cost: as output increases, average fixed cost declines because we are dividing a fixed number by a larger and larger quantity