Econ 001 midterm 2

equal to total product divided by the quantity of labor employed (tells how productive workers are on average)

average product of labor

Firm incurs an economic loss when at a quantity, marginal revenue (price) is less than _______ _____ _____

average total cost

total cost per unit of output

average total cost (U-shaped curve because of eventual diminishing returns and spreading TFC over a large output)

The supply curve is derived from the firm's marginal cost curve and ______ _____ ___ curve

average variable cost

total variable cost per unit of output

average variable cost (U-shaped curve because of eventual diminishing returns)

firm's opportunity cost of production is sum of the cost of using resources...

bought in market, owned by the firm, supplied by firm's owner

If price equals average total cost, a firm ____ ___. The entrepreneur makes normal profit.

breaks even

In the long run, a firm can vary both the quantity of labor and the quantity of _______, so in the long run, all the firm's cost are variable.

capital

In a market in which the minimum efficient scale is small relative to market demand, the market has room for many firms, and the market is therefore _______. In this situation, there is room in the market for many firms.

competitive

features of a firm's technology that keep average total cost constant as output increases

constant returns to scale

The firm maximizes profit by producing the output at which marginal revenue equals marginal ____ and marginal cost is increasing.

cost

The demand for a (perfect competition) firm's product is perfectly ______. (A sweater from Campus Sweaters is a perfect substitute for a sweater from any other factory.) But the market demand is NOT: its elasticity depends on the substitutability for other goods and services.

elastic

factors outside the control of a firm that raise the firm's costs as the market output increases

external diseconomies

factors beyond the control of an individual firm that lower the firm's costs as the market output increases

external economies

When constant returns to scale are present the LRAC curve is __________

horizontal

as a firm uses more of a variable factor of production, with a given quantity of the fixed factor of production, the marginal product of the variable factor eventually diminishes

law of diminishing returns

If price is _____ than average total cost, a firm incurs an economic loss.

less

time frame in which the quantities of all factors of production can be varied

long run (can change its plant, but decisions are not easily reversed)

When a firm is producing a given output at the least possible cost, it is operating on its _____ -____ _______ ___ _____. It is the relationship between the lowest attainable ATC and output when the firm can change both the plant (capital) it uses and the quantity of labor it employs. Once the firm chooses a plant, the firm operates on the short-run cost curves that apply to that plant.

long-run average cost curve

When economic profit and economic loss have been eliminated and entry and exit have stopped, a competitive market is in ___ ___ _____

long-run equilibrium

At a price equal to minimum average variable cost, the firm is indifferent between shutting down and producing no output or producing the output at minimum average variable cost. Either way, the firm minimizes its economic loss and incurs a _____ equal to total fixed cost

loss

firms are often more efficient than markets as coordinators of economic activity because they can achieve...

lower transaction costs, economies of scale, economies of scope, economies of team production

the increase in total cost that results from a one-unit increase in output (change in TC divided by change in output)

marginal cost (intersects AVC and ATC curve at their minimum points)

_______ ______ is measured by the slope of the total product curve

marginal product

increase in the total product that results from a one-unit increase in the quantity of labor employed, with all other inputs remaining the same

marginal product of labor

the change in total revenue that results from a one-unit increase in the quantity sold. calculated by dividing the change in total revenue by the change in the quantity sold.

marginal revenue

in a market in which the minimum efficient scale is large relative to the market demand, only a small number of firms, and possibly only one firm, can make a profit and the market is either an _________ or monopoly

oligopoly

market structure where a small number of firms compete

oligopoly (ex: Coke & Pepsi or Boeing & Airbus aircraft)

value of the best alternative use of the resources that a firm uses in production (value of real alternatives forgone)

opportunity cost of production

buying parts or products from other firms

outsourcing

In ________ _________, the firm's marginal revenue equals the market price.

perfect competition

type of market where there are many firms, each selling an identical product, many buyers, and no restrictions on entry of new firms into industry

perfect competition (ex: worldwide market for corn, rice)

Market demand and short-run market supply determine the market _____ and market output

price

Firms in perfect competition are _______ ______. It is a firm that cannot influence the market price because its production is an insignificant part of the total market.

price takers

perfect competition is a market in which (1) homogeneous ______ (2) perfect ___________ (3) each firm is ______ (4) free entry/exit (5) no external costs or benefits

product; information; small

the relationship between maximum output attainable and quantities of both labor and capital

production function [shows for a given plant size (1) the marginal product of labor diminishes as more labor is employed. for a given quantity of labor (2) the marginal product of capital diminishes as quantity of capital used increases]

Firm decisions about HOW to produce a given output does not depend on the type of market in which the firm operates. To study the relationship between a firm's output decision and its costs, we distinguish between 2 decision time frames:

short run & long run

time frame in which the quantity of at least one factor of production is fixed. the fixed factors of production is the firm's plant

short run (most firms: fixed FOP = capital, land, entrepreneurship, variable FOP = labor)

In _____ ______ _____, although the firm produces the profit-maximizing output, it does necessarily end up making an economic profit. It might do so, but it might alternatively break even or incur an economic loss.

short-run equilibrium

the price and quantity at which it is indifferent between producing and shutting down. occurs at a point at which AVC is a minimum

shutdown point

the past expenditure on a plant that has no resale value

sunk cost (irrelevant to the firm's current decisions) (only costs that influence its current decisions are the short-run cost of changing its labor inputs and the long-run cost of changing its plant)

In response to a profit-maximizing response > Law of supply: other things remaining the same, the higher the market price of a good, the greater is the quantity _________ of that good

supplied

any method of producing a good or service (includes detailed designs of machines and layout of the workplace)

technology

The position of a firm's short-run cost curves depends on two factors:

technology (better technology shifts product curves upward and cost curves downward / usually decreases TC & VC and increases FC) & price of factors of production

two concepts of production efficiency

technology efficiency & economic efficiency

forgone interest

the firm's funds used to buy capital could have been used for some other purpose. in their next best use, they would have earned interest

also known as opportunity cost of production

total cost

cost of all the factors of production a firm uses. We separate it into total fixed cost and total variable cost.

total cost

At prices (marginal revenue) above minimum average variable cost but below average total cost, the firm produces the loss minimizing output and incurs a loss, but a loss that is less than ______ _____ ______

total fixed cost

If the firm shuts down, it produces no output (Q=0). The firm has no variable costs and no revenue but it must pay its fixed costs, so its economic loss equals ____ ____ ____

total fixed cost

If the price (marginal revenue) falls below minimum average variable cost, the firm shuts down temporarily and continues to incur a loss equal to _____ _____ ___

total fixed cost

______ ______ ______ is the cost of the firm's fixed factors. Doesn't change as output changes. Equals the vertical distance between the TVC and TC curves

total fixed cost

maximum output that a given quantity of labor can produce

total product

______ _____ _______ is the cost of the firm's variable factors. Increases as output increases

total variable cost

costs that arise from finding someone with whom to do business, of reaching an agreement about the price and other aspects of the exchange, and of ensuring that the terms of the agreement are fulfilled

transaction costs

When diseconomies of scale are present, the LRAC curve slopes ________. Its main source is the challenge of managing a large enterprise.

upward

To increase output in the short run, a firm must increase the quantity of a ________ factor of production, which is usually labor.

variable (short run decisions are easily reversed)

Entry and exit stop when firms make _____ economic profit

zero

total fixed cost per unit of output

average fixed cost (curve slopes downward. as output increases, the same constant total fixed cost is spread over a larger output) (vertical distance between ATC and AVC curves is equal to AFC)

Economic loss equal TFC + TVC - ____

TR

Firm in perfect competition decides how to produce a minimum cost by operating with the plant that minimizes __________

LRAC

Plant size has a big effect on the firm's ATC. Two things stand out: (1) Each short-run ATC is __ -shaped (2) For each short-run ATC curve, the larger the plant, the greater is the output at which ATC is at a __________

U; minimum

Total product curve is similar to the production possibilities frontier. It separates the ________ output levels from those that are unattainable

attainable (inefficient - use more labor than is necessary to produce a given output) (only points on the total product curve are technologically efficient)

Average product ___________ and average variable cost increases

decreases

Entry and exit change the market supply. If firms exit a market, supply decreases and the market supply curve shifts leftward. The market price rises and economic loss _______. Eventually, economic loss is eliminated and exit stops

decreases

Entry results in an increase in market output, but each firm's output ______

decreases

features of a firm's technology that make average total cost rise as output increases

diseconomies of scale

When economies of scale are present, LRAC curve slopes ___________

downward

fall in the market value of a firm's capital over a given period

economic depreciation

equal to total revenue minus total cost

economic profit

goal of firm's decisions is to maximize ____________ ______

economic profit

When the cost of producing a unit of a good falls as its output rate increases, ____________ __ _______ exist. This idea arises from specialization that can be reaped more effectively by firm coordination rather than market coordination. Greater specialization of both labor and capital is the main source.

economies of scale

features of a firm's technology that make average total cost fall as output increases

economies of scale

A firm experiences ____________ __ _____ when it uses specialized (and often expensive) resources to produce a range of goods and services.

economies of scope (ex: Toshiba making iPod hard drive and many other different types of related products. Toshiba produces at a lower cost than a firm making only the iPod hard drive could achieve)

implicit rental rate of capital

firm uses its own capital (firm's opportunity cost of using the capital it owns) two components: economic depreciation & forgone interest

The short-run market supply curve shows the quantity supplied by all firms in the market at each price when each firm's plant and the number of firms remain _____

fixed

Shapes of the product curves are similar because almost every production process has two features: increasing marginal returns _______ and diminishing marginal returns eventually

initially

Entry and exit change the market supply. If firms enter a market, supply increases and the market supply curve shifts rightward. The increase in supply lowers the _____ ____ and eventually eliminates economic profit. When economic profit reaches zero, entry stops.

market price

A firm that is not economically efficient does not _________ ______

maximize profit

At the point of maximum marginal product, marginal cost is at a ___________

minimum

smallest output at which long-run average cost reaches its lowest level. plays a role in determining market structure.

minimum efficient scale

market structure in where a large number of firms compete by making similar but slightly different products (product differentiation)

monopolistic competition (ex: different pizza)

market structure where only one firm produces a good or service that has no close substitutes and in which the firm is protected by a barrier preventing entry of new firms

monopoly (local: electricity, cable TV / global: Microsoft)

If price is _______ than average total cost, a firm makes an economic profit

more

cost of entrepreneurship (profit that an entrepreneur earns on the average)

normal profit (firm's opportunity cost of production > supplied by the firm's owner)