Micro Econ 2306 Test 2
The law of diminishing marginal product shows the relationship
between inputs and outputs for a firm in the short run.
If a firm gets so large that management of employees and other resources becomes a costly problem, it will be experiencing
diseconomies of scale
Suppose a firm doubles its output in the long run. At the same time the unit cost of production remains unchanged. We can conclude that the firm is
facing constant returns to scale
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
Law of Diminishing Marginal Returns
principle that as the use of an input increases with other inputs fixed, the resulting additions to output will eventually decrease
profit maximization rule
produce at the rate of output where marginal revenue equals marginal cost MR=MC
The relationship Q = f(K, L) is an example of a
production function.
Shutdown Rule
shutdown if Price < Average Variable Cost
What are reasons a firm might experience economies of scale?
specialization dimensional factors more productive equipment
Marginal Utility (MU)
the additional satisfaction gained by the consumption or use of one more unit of a good or service
price discrimination
the business practice of selling the same good at different prices to different customers
Monopoly
the exclusive possession or control of the supply or trade in a commodity or service.
The observation that after some point, successive equal size increases in a variable factor of production, such as labor, added to fixed factors of production, will result in smaller increases in output is the
the law of diminishing marginal product
The shape of the short-run average total cost curve is a result of. . .
the law of diminishing marginal product
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
diseconomies of scale
the situation in which a firm's long-run average costs rise as the firm increases output
diseconomies of scale
the situation in which a firm's long-run average costs rise as the firm increases output and only occur in the long run
Total Utility (TU)
the total amount of satisfaction obtained from consumption of a good or service
The law of diminishing marginal product is NOT responsible for the shape of
total fixed cost curve
monopoly demand curve
- A monopolist is the only firm in the industry. Therefore, market demand curve = monopolist demand curve.
examples of monopolies
-Public companies: Natural Gas, Electric, Water
Perfect Competition in the Long Run
-firms enter/exit the market -firms adjust scale of operations until average cost is minimized -all resources are variable
Characteristics of perfect competition
1. Many buyers and sellers 2. The goods offered for sale are largely the same 3. Firms can freely enter or exit the market
Utility
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Characteristics of monopoly
1. single seller 2. no close substitutes 3. high barriers to entry 4. price setter
At Phil's Hot Dog Stand, we found the following: 4 laborers produced 66 hot dogs 5 laborers produced 76 hot dogs 6 laborers produced 85 hot dogs 7 laborers produced 88 hot dogs What was the marginal product of the sixth laborer?
9 hot dogs
The relationship between inputs and outputs is known as
A production function
Monopoly loss and stay in business graph
ATC is above P* and P* is above AVC
Monopoly shut down graph
ATC and AVC are both above P*
Reading Short Run Graphs
All MC = MR tells us is where we would be best off; NOT if we actually make a profit or not.
PC Break Even graph
Break even means zero economic profits, or just a normal rate of return Break even occurs when, at Q*, P = ATC
Diseconomies of scale occur
only in the long run.
constant cost industry
Entry (or exit) of firms does not shift the cost curves of firms in the industry
decreasing cost industry
Entry of new firms shifts the cost curves for all firms downward
Which of the following is NOT a reason a firm might experience economies of scale?
Increasing long-run average costs
implicit costs
Indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
Ajax Corporation has recently finished building a new factory. They moved into the factory a month ago and found that it is the perfect size given the amount they want to produce. Ajax is operating in the
Long run
Monopoly profit graph
P* is ABOVE ATC and AVC
Monopoly break even graph
P* is tangent to ATC
Long Run Monopoly Graph
Monopoly can make profits in long run
Perfect Competition profits short run graph
Profits are economic profits so include normal rate of return Profits occur whenever, at Q*, P is above ATC
Which of the following physical relationships might generate economies of scale?
Proportionally larger pipes can transport more than a proportional increase in oil.
PC shutdown graph
Shutdown rule: shutdown immediately if, at Q*, P drops below AVC
TC equals what
TC = TFC + TVC
Fixed costs include all but
Temporary labor
explicit costs
The actual payments a firm makes to its factors of production and other suppliers.
Utility Maximization Rule
The marginal utility of the last unit purchased of each good divided by the price should be equal. (MUa/Pa) = (MUb/Pb)
The point of diminishing returns
The quantity of a variable input where marginal product reaches its maximum
Which of the following statements is NOT true about the short run and the long run?
The short run for a firm is today while the long run is next week.
Which of the following statements ARE true about the short run and the long run?
These terms apply to the planning decisions of firms. In the short run, the firm can change the amount of variable inputs. The firm is always operating in the short run.
If the firm can vary all factors of production, it is operating
in the long run
Pure Competition Characteristics
Very large numbers of sellers, standardized product, "price takers", free entry and exit
increasing cost industry
an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward
When the average physical product is falling,
average variable costs are rising.
A fixed resource is one that
cannot be varied in the short run.
Monopoly Marginal Revenue
change in TR when Q changes
What is NOT a reason a firm might experience economies of scale?
increasing long-run average costs
The long-run average cost curve
is a curve which is tangent to each member of a set of short-run average cost curves.
Breakeven
level of output at which average total costs equal average revenue or market price ATC=AR
The planning curve is the
long-run average cost curve.
The lowest rate of output per unit of time at which long-run average costs for a firm are at a minimum defines
minimum efficient scale
examples of price discrimination
movie tickets, airline prices, cellphones, financial aid, colleges
Price discrimination conditions
• Firms face a downward sloping demand (market power) • Firms must identify differing groups of buyers
PC Loss but stay in business
• Loss means economic loss, so not getting normal rate of return but MAY make accounting profits • Loss but occurs whenever, at Q*, P is below ATC • Stay in business as long as staying in business means loss is less than immediately shutting
Barriers to entry in a monopoly
• Ownership of strategic resources • Economies of scale • Legal restrictions
Long run PC graph
•Average cost pricing (produce least cost) •Marginal cost pricing (produce what people want) •Zero Economic Profit •MUST be like this due to entry and exit
Long-run cost curves are U-shaped because
•Economies of Scale (increasing returns to scale) - specialized capital and labor •Constant Returns to Scale •Diseconomies of Scale (decreasing returns to scale) - Bureaucracy
examples of perfect competition
•New York Stock Exchange and other stockmarkets •Farmers Market
