microeconomics chapter 14
accounting profit
total revenue - explicit costs
short run product structure
relationship between the amount of labor used and the associated output
marginal product equaiton
the additional output of one more unit of labor (change in total product divided by change in labor)
if 25 workers can pick 100 flats of strawberries an hour, then average product is
4 flats an hour
total product
the maximum output associated with each level of labor
relationship between mp and ap
initial increasing returns (at low levels of labor) caused by specialization of labor
in the short run, total fixed cost does not change when the firm changes its output.
true
points on and below the total product curve are efficient
false
the firm's goal is to maximize profit
true
oligopoly
a small number of firms, product may be identical or varied, barriers to entry exist
tc
cost of k and l tc= tvc + tfc
the difference between a firm's total revenue and its total cost is its ________ profit
economic
the opportunity cost of a firm using its own capital is
economic depreciation
all costs are fixed in the long run
false
all of a firm's costs must be paid in money
false
an accountant measures profit as total revenue minus opportunity cost
false
marginal cost is always less than average total cost
false
increasing marginal returns occur when the
marginal product of an additional worker exceeds the marginal product of the previous worker
the main source of economies of scale is
specialization
afc
tfc divided by q
tr < tvc
the firms economic loss would > tfc, so the firm would shut down temporarily
total cost is equal to the sum of
total variable cost and total fixed cost
wage rates
when output = 0, tc = tfc because tvc= 0, wage rate is = to tvc when labor = 1, as output rises, afc decreases continuously
long run
in the long run, a firm can vary its quantity of labor and can vary its quantity of capital. economies of scale occur if, when a firm increases its plant size and labor employed by the same percentage, the firm's average total cost decreases. when the firm has diseconomies of scale, its long-run average cost curve slopes upward.
perfect competition
many firms, many buyers, identical product, no barriers to entry or exit, established firms have no advantage over new firms, sellers and buyers are well informed about prices
theory of the firm- product structure
the firm's goal is to maximize profit. a cost paid in money is an explicit cost; a cost incurred when a firm uses a factor of production for which it does not make a direct money payment is an implicit cost. the return to entrepreneurship is normal profit and is part of the firm's opportunity cost. a firm's total revenue minus total opportunity cost is economic profit.
short run
the time frame in which the quantities of some resources are fixed is the short run and the time frame in which the quantities of all the resources can be varied is the long run. marginal product equals the change in total product divided by the increase in the quantity of labor. average product equals the total product divided by the quantity of labor.
one of the major reasons for the u-shaped average total cost curve is the fact that
there eventually are decreasing returns to labor as more workers are employed
theory of the firm- cost structure
total cost equals total fixed cost plus total variable cost. marginal cost is the change in total cost that results from a one unit increase in output. average total cost equals average fixed cost plus average variable cost. the average total cost curve is u shaped. when the firm hires the quantity of labor aso that the marginal product is at its maximum, marginal cost is at its minimum.
constant returns to scale occur when the firm increases its plant size and labor employed by the same percentage and output increases by the same percentage
true
when a firm increases its plant size and labor, greater specialization of capital and labor can lead to economies of scale.
true
avc
tvc divided by q
marginal product
when the marginal product of an additional worker is less than the marginal product of the previous worker, the firm experiences decreasing marginal returns. the law of decreasing returns states that as a firm uses more of a variable input with a given quantity of fixed inputs, the input eventually decreases. if the marginal product exceeds the average product, the average product curve slopes upward.
law of decreasing returns
as output rises (labor rises), given fixed inputs, the additions to output (mp) eventually decreases because labor increases but capital is fixed
implicit cost
money is not spent in the moment
price taker
a firm that can not influence the price of the good or service that it produces (perfect competition)
monopolistic competition
many firms, differentiated product, no barriers to entry
an increase in the wage rate shifts the marginal cost curve upward
true
in the short run, the firms fixed inputs cannot be changed
true
tr > tvc
the firms economic loss is < tfc, so it pays the firm to produce and incur an economic loss
if 5 workers can wash 30 cars a day and 6 workers can wash 33 cars a day, then the marginal product of the 6th worker equals
3 cars a day
short run def
at least one fixed input, output is changed by varying the amount of labor used
atc = avc + afc
atc and avc get closer together as q rises because avc and atc are u shaped afc is getting smaller
most production processes initially have decreasing marginal returns followed eventually by increasing marginal returns
false
temporary shut down
in incurs an economic loss equal to tfc, if the firm produces some output it incurs an economic loss equal to tr- (tfc + tvc)
graph explained
initially tp increases at a increasing rate, eventually it still increases but at a decreasing rate, mp is the slope of the total product curve, increasing returns means marginal product is positive, decreasing returns means mp is positive but lower, negative returns means mp is negative
short run supply curve
shows how the firms profit maximizing output varies as the price varies
tfc
total fixed cost- cost doesnt change as output changes (cost of k)
economic profit
total revenue - explicit costs - implicit costs
tvc
total variable cost- cost changes as output changes (cost of l)
if a firm earns an economic profit, the return to the entrepreneurship exceeds normal profit
true
the average total cost curve is u-shaped.
true
to produce 10 shirts, the total cost is $80; to produce 11 shirts, the total cost is $99. the marginal cost of the 11th shirt is equal to
$19
total fixed cost is the cost of
a firm's fixed factors of production
long run def
all inputs are variable; longest lead time of all inputs
cost paid in money to hire a resource is
an explicit cost
short run cost
apply input costs to the product schedule to get the cost structure
profit maximizing output
as output increases, tr and tc increase when diminishing returns set, mr begins to decrease and tc eventually increases faster than tr
atc
avg tc- atc= total cost divided by quantity or tc divided by tp also equals avc + afc
marginal analysis
compares mr vs mc, as output increases mr remains constant but mc rises, if mr is greater than mc the extra revenue from selling 1 more unit is greater than the extra cost of producing it and economic profit increases if output increases
when the marginal product of labor exceeds the average product of labor, the average product curve is downward sloping
false
a firm's long run average cost curve shows the ___________ average cost at which it is possible to produce each output when the firm has had ______ time to change both its labor force and its plant
lowest, sufficient
diseconomies of scale can occur as a result of which of the following?
management difficulties as the firm increases its size
monopoly
no close substitutes exist, there is only one supplier, barriers to entry
in the short run, firms can increase output
only by increasing the amount of labor used
diminishing returns
onset is where mp 1st decreases
average product
output per each unit of labor (total product divided by labor) labor productivity
total revenue
price times quantity
explicit cost
requires actual money to be spent
total cost curve
tc = tfc + tvc, the shape of the tc curve is derived from the shape of the tvc curve the vertical distance between the tc and tvc curves is equal to tfc
marginal revenue
the change in total revenue that results from a 1 unit increase in the quantity sold
for a business, opportunity cost measures
the cost of all the factors of production the firm employs
which of the following is an example of an implicit cost?
the cost of using capital an owner donates to the business
mr = mc
the extra revenue from selling one more unit = the extra cost incurred to produce it, economic profit decreases if output increases or decreases so economic profit is maximized
mr is less than mc
the extra revenue from selling one more unit is less than the extra cost incurred to produce it, economic profit decreases if output increases
which of the following is correct?
the long run is the time frame in which the quantities of all resources can be varied
economies of scale and diseconomies of scale explain
the u-shape of the long-run average cost curve