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