Chapter 13
Production function
Relationship between quantity of inputs used to make a good (number of workers for ex) and the quantity of output of that good (cakes for example)
Industrial organization
the study of how firms' decisions about prices and quantities depend on the market conditions they face -# of similar firms near them -income/economic status of the surrounding people
Opportunity cost
what you could be making -at an other job -if you hadn't put money down from bank for your company that could be making interest
Diminishing marginal product
As the number of workers increases, the marginal product decreases because as the space becomes more densely occupied, and materials are shared, etc. (rival in consumption)
Explicit cost
inputs that require an outlay of money by the firm specifically what has directly cost a sum of money to be handed in
In short run, if market price > average variable cost
produce because you are earning more per product than you paid produce each one
In long run, if market price > average total cost
produce because you are earning more per product than you paid to produce each one
In short run, if market price < average variable cost
shut down, but don't exit (never exit in short run). Shut down because you are paying more to produce than you are to sell
Average revenue
(P * Q) / Q = P. So average revenue = price
Marginal revenue
Change in total revenue over a one unit increase
Marginal Cost
Changes in total variable cost per one unit increase The increase in total cost that arises from an extra unit of production
Variable cost
Costs that vary with the quantity of output produced
Total Cost
Fixed cost + Variable cost
If marginal product of labor is greater than or equal to cost workers should you stay in market?
Great than- yes Equal to- indiferent
Total revenue
How much money is earned as a company (P * Q)
Economies of scale
Long-run average total cost declines as output increases -this can be a result of specialized workers and therefore decreased assembly lines
Constant returns to scale
Long-run average total cost does not vary with the level of output
Diseconomies of scale
Long-run average total cost rises as output increase -organization issues inherent in large organization. when the organization gets bigger, work is spread across more managers and they have a harder time keeping cost down
Relationship between marginal cost and average total cost MC and ATC
The marginal cost curve crosses the average total cost curve at its minimum. once the curves cross, marginal cost rises above average total cost
Average fixed cost
Total fixed cost / # units produced
Total profit
Total revenue ($ earned) - total cost to company
Accounting profit
Total revenue - explicit costs (because it is taking away less from total revenue than in economic profit equation, it tends to be a larger number)
Economic profit
Total revenue - total costs (implicit + explicit)
Average variable cost
Total variable cost / # units produced
When will we produce?
When marginal revenue meets marginal cost
Fixed costs
costs that do not vary with the amount produced. each product costs FC + variable cost added as extra (equal to marginal cost)
Implicit cost
input costs that do not require an outlay of money by the firm What you could be earning