ECON 202 - Exam 2
- Change in demand: a shift of the curve - Caused by: a change in anything that affects demand other than wages (i.e, the price of labor) Increase in demand: curve shifts right Decrease in demand: curve shifts left
Demand
- Sole Proprietorship: 72% - Corporations: 18% - Partnerships: 10% Nearly ¾ of firms are sole proprietorships, and just one in six is a corporation
Number of Firms
A. economies of scale
A downward-sloping portion of a long-run average total cost curve is the result of A. economies of scale B. diseconomies of scale C. increasing returns D. the existence of fixed resources
- Higher revenue: because of the higher P - Lower revenue: you sell fewer units (lower Q)
A price increase has two effects on revenue:
1. Proprietorship 2. Partnerships 3. Corporations
3 Types of Business Firms
S Decrease, P Increase, Q Decrease D Decrease, P Decrease, Q Decrease - Quantity decreases, but ? for price
4. Decrease S, Decrease D
Partnership
> than 1 owner
Consumers will maximize utility by ensuring that the last dollar spent on each commodity yields an equal degree of marginal utility
Consumer Equilibrium
- Corporations: 82% - Partnership: 14% - Sole Proprietorship: 4%
Revenue
(PB - PE) x QT
Revenue from buyers
1. Contracting 2. Team production
There are two ways to organize productive activity:
A. quantity demanded would exceed quantity supplied
With a price floor below the equilibrium price, A. quantity demanded would exceed quantity supplied B. quantity supplied would exceed quantity demanded C. the market would be in equilibrium D. the equilibrium price would be expected to rise over time
Total Revenue
the amount a firm receives from the sale of its output TR = P×Q
S Increase, P Decrease, Q Increase D Decrease, P Decrease, Q Decrease - Price increases, but ? for quantity
2. Increase S, Decrease D
- The larger the share of the consumer's budget, the higher the elasticity - Ex. Lighters and Insurance
2. Products share of the consumers total budget
S Decrease, P Increase, Q Decrease D Increase, P Increase, Q Increase - Price increases, but ? for quantity
3. Decrease S, Increase D
- Known as the Second Law of Demand
3. When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run
- If cost per unit varies according to the size of the facility, then a Long Run Average Total Cost curve(LRATC) can be mapped out as the surface of all the minimum points possible at all the possible degrees of scale. - LRATC also known as the planning curve
A Typical LRATC Curve
Law of Diminishing Returns - Example: Think about fertilizer (variable input) and a piece of farm land (fixed input).
As more and more units of a variable resource are applied to a fixed amount of other resources, output will eventually increase by smaller and smaller amounts
B. ATC must be at its maximum
As output is expanded, if MC is more than ATC, A. ATC must be at its minimum B. ATC must be at its maximum C. ATC must be increasing D. the firm must be earning economic profit
Law of Diminishing Marginal Utility
As the consumption of a product increases, the marginal utility derived from additional consumption will eventually decline
AFC = TFC / Q - Average fixed costs always declines with output, holding other things constant
Average Fixed Cost Equation
AP = (total product)/(units of labor)
Average Product Equation
ATR = tax liability / taxable income
Average Tax Rate Equation
ATC = TC / Q ATC = AFC + AVC
Average Total Cost Equation
AVC = TVC / Q
Average Variable Cost Equation
Regressive tax
Average tax rate falls with income
Proportional tax
Average tax rate is the same at all income levels
Progressive tax
Average tax rate rises with income
This can occur because of, for instance: - mass production - Labor and managerial specialization - improvements in production as a result of experience
Reductions in per unit costs as output expands:
- Mountains = bomb - No mountains = rent control
Rent Control or Bombing?
Explicit Costs
Result when a monetary payment is made
(PE - PS) x QT
Revenue from sellers
1. Price of resources (P increase, ATC curve increases (shifts upward)) 2. Taxes (T increase, ATC curve increases (shifts upward)) 3. Regulations (R increase, ATC curve increases (shifts upward)) 4. Technology (T increase, ATC curve decreases (shifts downward))
Shifters of the Cost Curves
The Long Run Average Total Cost Curve (LRATC) -Outlines the possibilities available in the planning stage
Shows the minimum average cost of producing each output level when the firm is free to choose among all possible plant sizes
- Owners will attempt to control shirking through both incentives and monitoring. - These sort of problems known as principal-agents problems.
Shrinking
Sole Proprietorship
Single owner
Those who earn a higher wage will face a higher time cost *higher opportunity cost of time*
The cost of time is different for different individuals:
B. other goods that might have been produced with the same resources
The costs of a firm indicate the desire of consumers for A. the product produced by the firm B. other goods that might have been produced with the same resources C. goods that can be easily substituted for the good produced by the firm D. goods that are complementary with the good produced by the firm
Substitution effect
The good has become cheaper relative to other goods
Principal-agent problem
The incentive problem that arises when the lack of information makes it difficult for the purchaser (principal) to determine whether the seller (agent) is acting in the principal's best interest.
Deadweight loss
The loss to society that results from the loss of gains to trades that do not occur because a tax was imposed
Total Cost
The market value of the inputs a firm uses in production
Marginal Benefit - Marginal Benefit falls as you move down the demand curve
The maximum price a consumer will be willing to pay for an additional unit of the product (the height of the demand curve)
Average tax rate (ATR)
The percentage of income paid in taxes
Tax Incidence - It does not depend on whom the tax is imposed - Statutory incidence vs. actual incidence
The way the burden of a tax is distributed among economic units
PED = (106-84) /(106+84) x 100% = 11.57% (4-6) / (4+6) x 100% = -20% 11.57% / -20% = 0.58 0.58 < 1, so PED is inelastic
Use the following information to calculate the price elasticity of demand for hand grenades in bourbon street in a given day: ~ if P = $4, Qd = 106 ~ if P = $6, Qd = 84 - Use the midpoint method to calculate the price elasticity of demand between these points. - Is PED elastic, inelastic, or unitary elastic?
Contracting
Using outside producers for specific tasks
- Cannot be directly measured - As people consumed more of an item their total utility would change
Utility
- If the tax is legally imposed on sellers, shift the supply curve - If the tax is legally imposed on buyers, shift the demand curve - You'll reach the same conclusion either way
Ways to analyze:
The short version: Diminishing marginal returns Need larger and larger additions of variable factors to expand out by one unit.
We then observe MC begin to increase. Why
Make a profit
What a firm's main purpose?
4 Scenarios: 1. Increase S, Increase D 2. Increase S, Decrease D 3. Decrease S, Increase D 4. Decrease S, Decrease D
What happens if supply and demand both change at the same time?
C. Equilibrium price would become the market price
What would happen in a market where a price ceiling was set above equilibrium price? A. A surplus would occur B. The shortage would become larger C. Equilibrium price would become the market price
C. non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good
When a shortage of a good is present due to a price ceiling, A. the amount supplied will be greater than the amount demanded B. the quality of the good will generally improve C. non-price factors, such as discrimination or waiting in line, will play a greater role in the allocation of the good D. the demand for the product will increase and, thereby, eliminate the shortage
A. Go to the party
Your friend announces that there is going to be a mega blow-out party this Saturday night, which is the same night as the Lady Gaga concert. You really want to go to the party more than the concert, but you have already spent money on the concert tickets and its too late to sell them. What should you do? A. Go to the party B. Go to the concert C. Sit at home and watch Mega-Shark on the Sci-Fi channel while sadly lamenting your misfortune of both events being on the same night
- Fixed costs will remain unchanged as output rises or falls in the short run - Ex. Insurance premiums, property taxes, etc.
Fixed Costs
1. Limited income necessitates choice 2. Consumers make decisions purposefully 3. One good can be substituted for another 4. Consumers must make decisions without perfect information 5. The law of diminishing marginal utility applies to consumption
Fundamentals of Consumer Choice
$T x QT
Government Revenue
Income effect
It is as if your real income has increased.
- Firms demand labor - Labor demand curve is downward sloping because as wage decreases, firms will want to employ more people
Labor Demand
- Workers supply labor - Labor supply curve is upward sloping because as wage increases, people will want to work more.
Labor Supply
Corporations
Larger firms with stock options
- There is a close relationship between the demand for products and the demand for resources used to make those products
Linking the Markets
AVC (ATC) decreases
MC < AVC (ATC) →
AVC (ATC) increases
MC > AVC (ATC) →
rises
MC curve may decrease at first, but then
MC = change in TC / change in Q
Marginal Cost Equation
MP = (change in total product)/(change in labor input)
Marginal Product Equation
MTR = change in tax liability / change in taxable income
Marginal Tax Rate Equation
Price Elasticity of Demand
Measures how responsive consumers are to a change in the products price
Price elasticity of supply
Measures how responsive suppliers are to a change in price
Income Elasticity
Measures the responsiveness of the demand for a good to a change in income
PED= (Q0-Q1)/(Q0+Q1) x 100% (% change in quantity demanded) /(P0-P1)/(P0+P1) x 100% (% change in price) Q0 = Original Q1 = New P0 = Original P1 = New
Midpoint Equation (use when not given percent of change in quantity and price for the price elasticity of demand (E)
- Income elasticity is greater than 1
Normal Goods: Luxury
- Income elasticity is between 0 and 1
Normal Goods: Necessity
1. Making something illegal does not eliminate demand 2. If demand is strong and gains from trade are to be had, market will develop and exchange will occur 3. High price to account for risk (operating outside the legal structure). 4. Economic analysis shows that these markets are characterized by higher incidence of: a. Defective products (uncertain property rights, lower levels of competition) b. Higher profit rates (risk) c. Higher Violence (lack of legal means)
Note on black markets
Economies of Scale - Reductions in per unit costs as output expands
Occurs when the firm's per-unit costs decrease as output increases (Q↑ → LRATC↓)
Diseconomies of Scale - Increases in per unit costs as output expands
Occurs when the firm's per-unit costs increase as output increases (Q↑ → LRATC↑)
Constant Economies of Scale
Occurs when the firms per-unit costs do not change as output changes
- Change in quantity demanded: A movement along the curve - Caused by: a change in wages Increase in quantity demanded: movement down the curve (to the right) Decrease in quantity demanded: movement up the curve (to the left)
Quantity Demanded
- Change in quantity supplied: a movement along the curve - Caused by a change in wages Increase in quantity supplied: Movement up the curve (to the right) Decrease in quantity supplied: Movement down the curve (to the left)
Quantity Supplied
Flatter
Elastic Demand: Flatter or Steeper
= P increases, Q decreases
Elastic: TR decreases
= P decreases, Q increases
Elastic: TR increases
- Measure of the responsiveness of quantity demanded or quantity supplied ~ To a change in one of its determinants
Elasticity
- The quantity effect dominates - P and TR move in opposite directions
Elasticity and Total Revenue: Elastic
- The price effect dominates - P and TR move in the same direction
Elasticity and Total Revenue: Inelastic
- Demand is inelastic
Elasticity of Demand: Ed < 1
- Fixed (don't vary with quantity) - Variable (vary with quantity) *We can further break these down into total costs and "average" (or per-unit) costs*
2 Categories of Cost
Profit = Total revenue - Total cost *We assume that the firm's goal is to maximize profit*
Profit Equation
- Corporations: 67% - Partnership: 22% - Sole Proprietorship: 11%
Profits
S Increase, P Decrease, Q IncreaseD Increase, P Increase, Q Increase - Quantity increases, but ? for price
1. Increase S, Increase D
- Good Substitutes = Higher Elasticity - The more narrowly defined the product is the more elastic it is (because it has more good substitutes)
1. The most important determinant of the price elasticity of demand is the availability of substitutes
The Laffer Curve
A curve illustrating the relationship between the tax rate and tax revenue
Price ceiling
A legally established maximum price sellers can charge for a good or resource
Price floor
A legally established minimum price buyers must pay for a good or resource
Long Run
A time period long enough to allow the firm to vary all of its factors of production.
Short Run
A time period so short that a firm is unable to vary some of its factors of production; a period of time in which at least one input is fixed
output
AFC falls with
U-shaped
ATC is
LARGE
AVC is a LARGE part of ATC when output is
small
AVC is a small part of ATC when output is
Accounting Profit = Total Revenue - Explicit Costs
Accounting Profit Equations
- Limited personal liability - Greater ability to raise funds *But since larger firms tend to be corporations, most economic activity takes place through them*
Advantages: Corporation
- Ability to share work - Ability to share risks
Advantages: Partnership
- ·Control by owner ·- No layers of management
Advantages: Sole Proprietorship
B. an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed
An increase in the number of students graduating with a major in engineering would result in A. a decrease in the supply of engineers that would increase the wage of engineers and decrease the number employed. B. an increase in the supply of engineers that would decrease the wage of engineers and increase the number employed. C. a decrease in the demand for engineers that would decrease the wage of engineers and decrease the number employed. D. an increase in the demand for engineers that would increase the wage of engineers and increase the number employed
- The minimum wage is an example of a price floor. - Raising minimum wage increases excess labor supply (unemployment).
Application: Minimum Wage
- Because of shortage ~ Sellers must ration the goods among buyers
Application: Rent Control
D. a reduction in the quality traded
Both price floors and price ceilings lead to A. shortage B. surpluses C. reductions in quality D. a reduction in the quality traded
PED = (8-12) / (8+12) x 100% = -20% ($250-$200) / ($250+$200) = 11.11% -20% / 11.11% = -1.80, take the absolute value = 1.80 1.80 > 1, so it is elastic
Calculating PED: B (8, $250) and A (12, $200)
- Increase in labor demand: labor demand shifts right - Decrease in labor demand: labor demand curve shifts left
Changes in Labor Demand
- Increase in labor supply: labor supply curve shifts right - Decrease in labor supply: labor supply curve shifts left
Changes in Labor Supply
Inelastic Demand - Small change in QD
Changes in quantity are not sensitive to changes in price
Elastic Demand - Large change in QD
Changes in quantity are sensitive to changes in price
1. Black markets 2. A decline in the supply of future rental housing 3. A decline in quality of rental housing 4. Non-price methods of rationing (discrimination) 5. Inefficient housing match-ups (perhaps unfair as well)
Consequences of Rent Control
MUA / PA = MUB / PB
Consumer Equilibrium Equation
- Short run: ~ Some inputs are fixed (e.g., factories, land) ~ The costs of these inputs are FC - Long run: ~ All inputs are variable (including plant size) ~ All costs are variable in the long run. - In the long run ~ ATC at any Q is cost per unit using the most efficient mix of inputs for that Q (e.g., the factory size with the lowest ATC)
Costs in the Short Run & Long Run
Sunk Costs - Should be ignored - Go with the highest utility
Costs that have already been incurred as a result of past decisions
- There is not a unique best business structure. - Corporations benefit from limited liability but are expensive to organize. - Also, their profits may be taxed twice: once as corporate profits, and again when the profits are disbursed to investors.
Differences among Business Organizations
- Costly to organize - Possible double taxation of income
Disadvantages: Corporation
- Unlimited personal liability - Limited ability to raise funds
Disadvantages: Partnership
- Unlimited personal liability - Limited ability to raise funds
Disadvantages: Sole Proprietorship
Excess Burden of Taxation
Deadweight loss is also known as...
- Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic. ~ That is, goods for which either supply or demand are not sensitive to price changes
Determinants of Deadweight Loss
- More elastic supply curve ~ Larger deadweight loss - More elastic demand curve ~ Larger deadweight loss
Determinants of Deadweight Loss: Price elasticities of supply and demand
1. The most important determinant of the price elasticity of demand is the availability of substitutes 2. Products share of the consumers total budget 3. When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run
Determinants of Price Elasticity of Demand
Economic Profit = Total Revenue - Explicit Costs - Implicit Costs
Economic Profit Equation
- Demand tells firms what to produce; indicates the intensity of consumers' desires for an item. - Conversely, production of a good requires resources. The opportunity cost of these resources represents the desire of consumers for other goods that might have been produced instead.
Economic Role of Costs
only when the rate of return is above the normal market rate of return (the opportunity cost of capital)
Economic profit occurs
long run concepts (where all factors are variable)
Economies and diseconomies of scale are
Utility
Economists refer to the enjoyment or satisfaction that people obtain from consuming goods and services
- The effects are the same (no change in total revenue)
Elasticity and Total Revenue: Unitary Elastic
- Demand is perfectly inelastic
Elasticity of Demand: Ed = 0
- Demand is unit elastic
Elasticity of Demand: Ed = 1
- Demand is perfectly elastic
Elasticity of Demand: Ed = ∞
- Demand is elastic
Elasticity of Demand: Ed > 1
C. 2.5, making cheezy poofs a luxury for Cartman
Eric Cartman recently received a 10 percent increase in his income. His purchase and consumption of the snack food "Cheezy Poofs" has since increased by 25 percent. Eric Cartman's income elasticity for Cheezy poofs is A. -2.5, making cheezy poofs an inferior good for Cartman B. 2.5, making cheezy poofs a necessity for Cartman C. 2.5, making cheezy poofs a luxury for Cartman D. 0.40, making cheezy poofs a necessity for Cartman
Governments can sometimes improve market outcomes - Want to use price controls ~ Because of unfair market outcome ~ Aimed at helping the poor - Often hurt those they are trying to help - Other ways of helping those in need ~ Rent subsidies ~Wage subsidies (earned income tax credit)
Evaluating Price Controls
Markets are usually a good way to organize economic activity - Economists usually oppose price ceilings and price floors - Prices are not the outcome of some haphazard process - Prices have the crucial job of balancing supply and demand - Coordinating economic activity
Evaluating Price Controls
1. Competition among firms for investment funds & customers 2. Compensation and management incentives 3. The threat of corporate takeover
Factors that promote cost efficiency and customer service but limit shirking by corporate managers include:
C. is $4,000 on automobile buyers and $1,000 on sellers
If a $5,000 tax is placed legally (statutorily) on the sellers of new automobiles and as a result the price of automobiles to consumers rises by $4,000, then the actual burden of the tax A. falls completely on automobile buyers B. falls completely on automobile sellers C. is $4,000 on automobile buyers and $1,000 on sellers D. is $1,000 on automobile buyers and $4,000 on sellers
D. 0.5, inelastic 2/-4 = -.50, take the absolute value = .50
If the price of alcohol on FSU's campus decreases by 4 percent and causes alcohol consumption to increase by 2 percent, the price elasticity of demand is ____, indicating that the demand for alcohol among FSU students is A. 2, elastic B. 2, inelastic C. 0.5, elastic D. 0.5, inelastic
A. an annual business license fee paid to the local government
If you were operating a fast-food restaurant, which of the following would represent a fixed cost of production in the short run? A. an annual business license fee paid to the local government B. wages paid to workers C. the cost of electricity to light the restaurant D. the cost of paper supplies (napkins, bags, etc.)
- A tax on the sellers of a product will cause the supply curve to shift up by the amount of the tax. - A tax on the consumers of a product will cause the demand curve to shift down by the amount of the tax
Impact of a Tax
1. Raises the price that buyers pay 2. Reduces the amount sellers receive 3. Reduces the quantity sold 4. Increases government revenue 5. Creates deadweight loss
Impact of a Tax: Regardless, a tax
Normal Profit Rate *Zero economic profit does NOT mean the business is failing*
Is zero economic profit, yielding just the competitive rate of return on the capital and labor of the owners
IE = %∆QD / %∆I *SIGN DOES MATTER*
Income Elasticity Equation
- Negative income elasticity
Income elasticity determines the type of good: Inferior Goods
- Positive income elasticity
Income elasticity determines the type of good: Normal Goods
This can occur because of: - Control and coordination problems - Communication problems - Worker alienation - Shirking
Increases in per unit costs as output expands:
short run concepts (where at least one factor of production is fixed)
Increasing and diminishing returns are
Residual Claimants - Residual claim provides a strong incentive to keep costs of production low
Individuals who personally receive the excess of revenues over costs
Steeper
Inelastic Demand: Flatter or Steeper
= Price decreases, Q increases
Inelastic: TR decreases
= Price increases, Q decreases
Inelastic: TR increases
Implicit Costs - Example: ~ time spent by owner running the firm ~ the foregone normal rate of return on the owner's financial investment (opportunity cost of equity capital)
Involve the opportunity costs associated with the firm's use of resources that it owns
When the price of a good decreases: 1. Substitution Effect 2. Income Effect
People will buy more (less) of a good as the price of the good decreases (increases) for two reasons:
- Price elasticity is NOT the slope of the demand curve - A straight-line demand curve will have constant slope but a different elasticity at every point
Price Elasticity of Demand (Key Point)
- Use percentages ~ Unit free measure ~ Compare elasticities across products - Always negative, so we use the absolute value (ignore the negative sign) ~ Easier to compare elasticities
Price Elasticity of Demand Equation
PED = %∆QD / %∆P *Always negative, so we use the absolute value (ignore the negative sign)*
Price Elasticity of Demand Equation
-Similar to the price elasticity of demand, the price elasticity of supply will be greater in the long run. (The more time passes, the flatter the curve will be.)
Price Elasticity of Supply
PES = %∆QS / %∆P *SIGN IS ALWAYS POSITIVE* - Direct relationship between supply and price
Price Elasticity of Supply Equation
- A price ceiling below market equilibrium price creates a shortage - A price ceiling above market equilibrium price does nothing
Price ceiling
- A price floor above equilibrium price creates a surplus - A price floor below equilibrium price does nothing
Price floor
- Change in supply: A shift of the curve - Caused by a change in anything that affects supply other than wages (i.e, the price of labor) Increase in supply: curve shifts right Decrease in supply: curve shifts left
Supply
C. Less than 1
Suppose you are managing a clothing store and you plan to increase revenues by increasing the price of the clothing that you sell. What must the absolute value of the price elasticity of demand for the clothing in your store be in order for your plan to make sense? A. Greater than 1 B. Equal to 1 C. Less than 1 D. Perfectly elastic
- Does depend on elasticity - The burden of the tax will fall on those who are relatively inelastic. - Deadweight loss will be lower if taxes are placed on goods that are relatively inelastic.
Tax Incidence
Tax Burden
Tax Incidence is also known as
- Government uses taxes ~ To raise revenue for public projects (roads, schools, and national defense) *We will only consider per-unit taxes*
Taxes
Marginal Costs (MC) - Typically, MC will decline initially, reach a minimum, and then rise
The change in total costs required to produce an additional unit of output.
- Price for labor is called the wage (W) - Quantity of labor is called employment (E) - Works just like the market for goods, only with a different name for price (wage) and quantity (employment)
The Labor Market
- Higher tax rates will not always lead to more tax revenue!! - Alternatively, lower tax rates will not always lead to less tax revenue!!
The Laffer Curve
- Sum the individual demand curves horizontally - To find the total quantity demanded at any price, we add the individual quantities
The Market Demand Curve
1. Progressive tax 2. Regressive tax 3. Proportional tax Note: These deals with percentage paid in taxes! Actual dollar amounts paid might still be higher for people with higher income.
The Tax System: 3 possibilities
Marginal Tax Rate (MTR) - Are important personal decision making
The additional tax liability a person faces divided by his or her additional taxable income
Marginal Utility - Remember: in economics, "marginal" means "additional"
The amount by which total utility would change when consuming an extra unit of a good or service
Marginal Utility
The benefit derived from consuming an additional unit of the good
B. at small output rates, AFC will be high while at large output rates MC will be high as the result of diminishing returns
The short run average total cost (ATC) curve of a firm will tend to be U-shaped because A. larger firms always have lower per unit costs than smaller firms B. at small output rates, AFC will be high while at large output rates MC will be high as the result of diminishing returns C. diminishing returns will be present when output is small while high AFC will push per unit cost to high levels when output is large D. increasing marginal returns will be present at both small and large output rates
Total Fixed Costs (TFC)
The sum of the costs that do not vary with output
Total Variable Costs (TVC) - Ex. wages, raw materials
The sum of those costs that change with output
A. 5 percent and quantity supplied rises by 7 percent
The supply of product X is elastic if the price of X rises by: A. 5 percent and quantity supplied rises by 7 percent B. 8 percent and quantity supplied rises by 8 percent C. 10 percent and quantity supplied remains the same D. 7 percent and quantity supplied rises by 5 percent
one only produces if the additional revenue from one more unit is greater than the marginal cost of that unit
To increase profits:
Total Cost = Explicit Costs + Implicit Costs
Total Cost Equation
Average Total Costs (ATC)
Total Cost divided by the number of units produced
TC = TFC + TVC
Total Costs Equation
Average Fixed Costs (AFC)
Total Fixed Costs divided by the number of units produced
TR = P×Q
Total Revenue Equation
Total Revenue = Price x Quantity
Total Revenue Equation
Total Product
Total output of a good associated with different levels of a variable input
Average Variable Costs (AVC)
Total variable costs divided by the number of units produced
C. an increase in price will increase total revenue
When the percentage change in price is greater than the resulting percentage change in quantity demanded: A. a decrease in price will increase total revenue B. demand may be either elastic or inelastic C. an increase in price will increase total revenue D. demand is elastic
Team production
Where employees work together under the supervision of the owner (or owner's representative)
C. the foregone salary the owner would have earned if working for someone else instead of running the company
Which of the following is most likely to be an implicit cost of production? A. the wages the owner pays to her employees B. the property taxes on a building owned by the firm C. the foregone salary the owner would have earned if working for someone else instead of running the company D. the interest paid on outstanding loans of the business
A. Marginal cost is less than average total cost
Which of the following must be true if average total costs are declining? A. Marginal cost is less than average total cost B. Marginal cost is less than average variable cost C. Marginal cost is greater than average total cost D. Marginal cost equals average total cost
1. We have increasing returns to start with 2. More efficient production (learning by doing for example)
Why do we see this U-shape? Let's focus on marginal cost. At the beginning we see decreasing MC because of
Shirking - Examples: Long coffee breaks, lunches, water breaks, etc.
Working at less than the expected rate of productivity, which reduces output
