Microeconomics: Part 2

List some characteristics of perfectly competitive firms.

- Many firms compete for consumer purchases. - The products of each firm are identical -Low entry barrier make it easy to get into the business. - No firm has any market power; thus firms cannot manipulate the price. (price takers) - Each firm's output is small relative to the total market amount. - Each firm confronts a horizontal demand curve.

How are the various measures of costs related?

- TC= FC+ VC - Average costs are calculated by dividing each (TC, FC, VC) by quantity produced -Marginal costs intersects ATC as its minimum point.

What shapes or shifts a firm's supply curve?

- When a firm's supply curve is above the shutdown point at minimum AVC - When the determinants of supply include the price of inputs (technology, taxes, and expectations) -When there is an increase in cost the supply curve shifts to the left-decrease in cost causes supply curve to shift to the right - Taxes(Property taxes raise fixed costs; payroll taxes raise variable costs; profit taxes diminish after tax profits.)

Under the Production Function what are the 3 questions we must ask?

1. How is the best to produce 2. What is the smallest amount of output attainable from a given quantity of resources? 3. What is the maximum amount of output attainable from a given quantity of resources?

Perfectly competitive markets are characterized by:

1. Many firms-lots of businesses are competing for consumers purchases 2. Identical products- the products of the different firms are identical or nearly so. 3. Low entry barriers- it is relatively easy to get into the business.

When will a firm shut down?

A business will shut down when... - A loss occurs (if price falls below ATC.) - If revenues at least cover variable costs, the firm's operating loss is less than its fixed costs. * A firm should not shut down until price falls below AVC

How does a competitive fir maximize its profit?

A competitive firms maximizes its profit when, P=MR=MC

Production Function

A technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs

What are the most likely basis of Production decisions?

Dollar costs are the most likely basis of production decisions. The dollar costs are directly related to the underlying production function.

Describe the difference between economic nab accounting costs?

Economic costs include the value of al resources used (they = the sum of explicit costs and implicit costs), while Accounting costs include only those dollar costs actually paid. (They = explicit costs only).

How are profits computed?

Economic profit= TR-TC (* this includes both explicit and implicit costs)

Economic cost=

Explicit costs + Implicit costs

As the rate of output increases, AFC decreases as the fixed cost is spread over more output. This is known as _________________?

Falling Average Fixed Cost (AFC)

True or False: Economic profit accounts for the opportunity cost of only a select few resources.

False: Economic profit accounts for the opportunity costs of ALL resources

True or False: The goal of a firm is to maximize revenue, rather than profit

False: The goal of a firm is to maximize profit, not revenue

True or False: The production function represents the minimum technical efficiency.

False: The production function represents the MAXIMUM technical efficiency- that is, the most output attainable from any given level of factor inputs

True or False: Whenever MPP is increasing, the marginal cost of producing a good is rising.

False: Whenever MPP is increasing, the marginal cost of producing a good must be falling. If MPP decline, marginal cost will then increase.

What type of costs do not change when the output changes in the short run?

Fixed costs

How does the law of diminishing returns apply to the production process?

Given a fixed input (using capital), adding a variable input (usually labor) will increase total product but at a diminishing rate. (As returns diminish and MPP declines marginal cost (MC) increases.

The opportunity cost of students doing home work is an example of?

How economic and accounting costs will diverge. Whenever any factor of production is not paid an explicit wage.

What is the essential economic question?

How many resources are used in production

Describe the general assumption of Short-Run.

In the short-run, labor can changes while capital. is held constant in the short-run. As the amount of labor used increases in general, the output will also increase.

If price is greater than marginal cost, what can a firm do to attain profit maximization?

Increase output

What is the difference between production and investment decisions?

Production decision- in the short run, when a firm determines how must to produce (the profit maximizing output) Investment decision- in the long run, when a firm must commit to incur fixed costs and to enter or exit an industry.

Factors of Production

Resource inputs used to produce goods and services, such as land, labor, capital, and entrepreneurship.

As the rate of output increases, AVC will eventually rise. AVS rise because of diminishing returns in the production process. This is known as ____________________?

Rising Average Variable COST (AVC)

The period in which at least one input is fixed in quantity is the

Short-run

Describe A Cost Summary.

Te output decision has to be based not only on the capacity to production (the production function), but also on the costs of production ( the cost functions).

Minimum Average Cost:

The bottom of the "U", which represents the lowest possible opportunity costs to produce the product.

Marginal Physical Product (MPP)

The change in total output associated with one additional unit of input. MPP= change in total output/ change in input quantity

Marginal Cost

The increase in total cost associated with a one-unit increase in production. MC= change in Toal cost/change in output

Describe the relationship between Marginal cost and Average Total Cost Intersection.

The marginal cost curve ALWAYS intersects the ATC and AVC curves at their lowest points. -If MC > ATC, ATC is increasing -If MC < ATC, ATC is decreasing -If MC > AVC, AVC is increasing - If MC < AVC, AVC is decreasing

Law of demising returns

The marginal physical product of a variable input decline as more of it is employed with a given quantity of other (fixed) inputs.

Total COST

The market value of all resources used to produce a good or service. TC= FC+VC

Short-run

The period in which the quantity and quantity of some inputs cants be changed

Describe the Production Function and the two types of production.

The production function implies that it costs something to produce a good- no matter what the good is. The two types of production are: 1. Factors of Production 2. Production Function

What does the production function represent?

The production function represents the maximum amount of output that can be produced with different combinations of inputs. (As the variable input is increased, more intuit is produced. This is measured by marginal physical product (MPP))

Varying Input Levels

The productivity of any factor of production depends on the amount of other resources available to in. In other words the output is affected by the various inputs.

Production Decision:

The selection of the short-run rate of output (with existing plant and equipment)

Average total Cost (ATC)=

Total cost/ total output = AFC+AVC

Average Fixed cost (AFC) =

Total fixed costs/ Total output

Total Profit =

Total revenue- total cost

Average Variable cost (AVC) =

Total variable cost/ Total output

True or False: A perfectly competitive firm is one whose output is so small in relation to market volume that its output decisions have no perceptible impact on price.

True

True or False: Accounting costs are all of the costs that have an explicit dollar cost attached to them.

True

True or False: Diseconomies of scale occur when an increase in plant size results in reduced operating efficiency.

True

True or False: Economic profit= TR-TC, and TC= implicit+ explicit costs

True

True or False: Economies of scale arise when cost savings occur as size increases

True

True or False: For perfectly competitive firms, price equals marginal revenue.

True

True or False: If MPP of labor is greater than zero, then the total output will increase

True

True or False: Marginal cost refers to the change in total cost associated with one more unit of output.

True

True or False: The economic cost of a product is measured by the value of the resources needed to produce it

True

True or False: The goal of producers is to maximize profit

True

True or False: The individual firm's demand curve is horizontal based on the established market price, indicates that a firm cannot raise its price, and indicates that a firm can sell additional output without cutting price.

True

True or False: The law of diminishing returns states that beyond some point, the marginal physical product of a factor of production diminishes as more of it is employed with a given quantity of other inputs.

True

True or False: The lowest cost possible (when output is zero) is equal to the fixed costs

True

True or False: The market demand curve for a product is always downward sloping. The intersection of the market demand and supply curves sets the market price. Collectively producers may move the market supply curve and change the equilibrium price.

True

True or False: The most desirable rate of output is the one that maximizes total profit

True

True or False: The purpose of the production function is to tell us how much output we can produce with varying amounts of factor inputs.

True

True or False: U- shaped ATC is illustrated when the initial dominance of falling AFC, combined with the later resurgence of rising AVC, is what gives the ATC curve its characteristic U shape.

True

True or False: Under the Law of Demising Returns as more labor is hired, each unit of labor has less capital and land to work with.

True

True or False: Whenever economic costs exceed explicit cots, observed (accounting) profits will exceed true (economic) profits.

True

True or False: the opportunity for profit may be limited by the structure of the industry

True:

True or False: Diseconomies of scale arise when costs increase as plant size grows beyond the minimum ATC point.

True: "Bigger isn't always better"

True or False: There are no fixed costs in the long-run

True: In the long-run, new sites can be leased, new equipment can be installed, and new buildings can be constructed.

True or False: The primary objective of the producer is to find that one particular rate of output that maximized profit

True: Profits are maximized at the rate of output here price =marginal cost

True or False: The short run is characterized by fixed costs.

True: These costs (factory, equipment, etc. ) cannot be changed in the short run.

True or False: Total costs increase as output expands, but the rate of cost increase varies.

True: This reflects the law of diminishing returns

Monopoly

a firm that produces the entire market supply of a particular good or service

Perfect competition

a market in which no buyer or seller has market power

Explicit cost:

a payment made for the use of a resource

Long -run

a period of time ling enough for all inputs to be varies (no fixed costs )

Which of the following is a factor of production for the Little Biscuit Bread Co.? a. flour b.Bread c. productivity d. Money

a. flour

Long-Run Marginal Costs

also known as the long-run marginal cost curve (LMC) which intersects our long-run cost curve at its lowest point.

Fixed cost

cost of production that don't change when the rate of output is altered (e.g. the cost of basic plant and equipment) (There is no way to avoid fixed costs in the short-run)

Variable costs

costs of production that change when the rate of output is altered

Variable cost

costs of production that change when the rate of output is altered (e.g. labor and material costs) (How fast total costs rise depends on variable costs ONLY)

Fixed costs

costs of production that don't change when the rate of output is altered (are incurred even if no output is produced)

Constant Returns to Scale

increases in plant size do not affect minimum average cost:minimum per-unit costs are identical for small plants ad large plants

Long-run Average Costs

is also known as the long-run cost curve (LATC) that summarizes our best short-run cost possibilities, using existing technology and facilities.

A production function shows the _______________________________.

maximum output of a good attainable from different combinations of factor inputs.

Efficiency

maximum output of a good from the resources used in production

Productivity

output per unit of input (e.g. output per labor-hour)

Total revenue

price*quantity sold in a given time period

Profit- Maximization Rule:

produce at the rate of output where marginal revenue = marginal cost

Economies of Scale

reductions in minimum average costs that come about through increase in the size (scale) of plant and equipment.

Market Power

the ability to alter the market price of a good or service

The Profit Motive

the basic incentive for producing goods and services is the expectation of profit

Marginal revenue (MR)

the change in total revenue that results from a one-unit increase in the quantity sold. (MR= change in TR/ change in Output)

Profit

the difference between total revenue and total cost (there is no reason to expect maximum. profit to coincide with maximum output)

Marginal costs

the increase in total costs associated with a one-unit in crease in production

Entrepreneurship

the inducement to take on the added responsibilities of owning and operating a business( is the potential for economic profit)

Opportunity cost

the most desired goods or services that are foregone in order to obtain something else

market structure

the number and relative size of firms in an industry

Normal Profit

the opportunity cost of capital; zero economic profit.

Short-run

the period in which the quantity (and quality) of some inputs can't be changes

Risk

the potential for profit is not a guarantee of profit. Profit represents compensation to owners for the risks incurred in owning ir operating a business.

Economic Cost

the value of all resources used to produce a good or service (opportunity cost)

Implicit cost

the value of resources used, for which no direct payment is made

Profit- Maximizing Rule

where marginal revenue= price