Ch. 11-15

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Average Revenue

AR=TR/Q=P

________________ is the smallest quantity of output at which the long-run average cost reaches its lowest level.

Minimum efficient scale

T/F All costs are changeable and can be renegotiated

True

T/F Cost Curve FC is the same at each out put level

True

T/F Fixed costs do not change with the quantity of input

True

If the firms in the market make an economic loss,

firms begin to exit, market supply shifts to the left P rises, reduces loss

when MP exceeds AP, AP

increases

Economies of scales occur when

increasing production allows greater specialization

Economies of scale is also called

increasing returns to scale

Increasing marginal product

initially the marginal product of a worker exceeds the marginal product of the previous worker the firm experiences increasing marginal returns

The long run

is a time frame in which the quantities of ALL resources-including the plant size-can be varied

If the firm expects the loss to be permanent,

it will go out of business, i.e., exit the market.

Variable factors in the short run are

labor, raw materials and energy

A firm's production function exhibits:

Diminishing marginal returns to labor (for a given plant) Diminishing marginal returns to capital (for a quantity of labor).

When AP is rising,

AVC is falling

Many firms sell identical products to many buyers. - Everyone is a price taker, no one is a price maker. There are no restrictions to entry into the industry. No market barriers. Established firms have no advantages over new ones. Sellers and buyers are well informed about prices.

Characteristics of a perfectly competitive market

______________ are features of a firm's technology that lead to rising long-run average cost (LRAC) as output increases.

Diseconomies of scale

TC -TR = ATC x Q - P x Q = (ATC - P) x Q

Economic Loss

____________are features of a firm's technology that lead to falling long-run average cost (LRAC) as output increases.

Economies of scale

Total cost=

FC+VC

AFC

FC/Quantity of output

Define AR

How much revenue a firm receives from a typical unit of good sold

What if AVC<P?

If firm keeps producing, Q > 0, then AVC - P<0 thus (AVC-P)Q<0 Firm's economic loss is smaller than fixed cost if keep producing.

What if AVC>P?

If the firm shuts down, Q=0, and the firm still has to pay its fixed cost but stops making more loss

Why is ATC U-Shaped?

Influence of two opposing forces: 1. Spreading fixed cost over a larger output—AFC curve slopes downward as output increases. 2. Eventually diminishing returns—the AVC curve slopes upward and AVC increases more quickly than AFC is decreasing. • In addition, ATC falls at low output levels because AFC is falling quickly

Why is the AVC curve U-shaped?

Initially, MP exceeds AP, which brings rising AP and falling AVC Eventually MP falls below AP, which brings falling AP and rising AVC

Economies of scale:

LRATC falls as Q increases.

Diseconomies of scale

LRATC rises as Q increases

Constant returns to scale:

LRATC stays the same as Q increases.

When MP is rising,

MC is falling

MC

MC=change in TC/ change in quantity

If__________, economic profit decreases if output increases.

MR<MC

If _________, economic profit is maximized

MR=MC

In a perfectly competitive market, MR=P so

MR=MC=P

Marginal Revenue

MR=change in TR/change in Quantity=P

If _______, economic profit increases if output increases.

MR>MC

Zero economic profit when

P=ATC

Compare with the firm's ATC to determine if the firm breaks even, makes a positive economic profit or loss.

Short run in the perfect competition market

ATC=

TC/Quantity of output

As the quantity of labor increases

TP increases MP increases then decreases AP decreases

If increase quantity by one unit,

TR rises by MR, total cost rises by MC

Total Revenue

TR=PxQ

Long Run ATC

The firm can change to a different factory scale in the long run, but not in the short run.

Perfect competition arises when:

The firm's minimum efficient scale is quite small relative to the market demand, so there is room for many firms in the market. The good or service has no unique characteristics, so consumers don't care which firm's good they buy. Each firm's product is a perfect substitute for the product of the other firms in that market, so the demand for each firm's product is perfectly elastic!

The _____________is the increase in output resulting from a one-unit increase in the amount of capital employed, holding constant the amount of labor employed.

The marginal product of capital

Three concepts that describe the relationship between output and the quantity of labor employed (input):

Total product Marginal product Average product

T/F - The larger the plant, the greater is the output at which ATC is at a minimum.

True

T/F A firm experiences economies of scale up to some output level. Beyond that output level, it moves into constant returns to scale or diseconomies of scale.

True

T/F Cost Curve Over the output range with increasing marginal returns, marginal cost falls as output increases

True

T/F Cost Curve TC increases as output increases

True

T/F Cost Curve VC increases as output increases

True

T/F Firms have more control over costs and can adjust the size of the production process

True

T/F If the LRAC curve is U-shaped, the minimum point identifies the minimum efficient scale output level.

True

T/F In perfect competition, the firm's MR ALWAYS equals the market price

True

T/F In the long run, all inputs are variable and all costs are variable.

True

T/F Long run decisions are not easily reversed

True

T/F Marginal product declines eventually

True

T/F Once the firm has chosen its plant (scale), the firm incurs the costs that correspond to the ATC curve for that plant

True

T/F Sunk costs are irrelevant to a firm's current decisions

True

T/F The LRAC curve is a planning curve that tells the firm the plant that minimizes the cost of producing a given output.

True

T/F The average cost of producing a given output varies and depends on the firm's plant.

True

T/F The shapes of a firm's cost curves are determined by the technology it uses, thus are linked to shapes of Product curves

True

T/F Total product is the total output produced in a given period

True

T/F When MR=MC, or when ∆ Profit = 0, profit is maximized.

True

T/F an increase in productivity shifts the product curves upward and the cost curves downward

True

T/F some decisions are irreversible (or very costly to reverse)

True

T/F to increase output in the short run, the firm must increase the quantity of variable factors

True

T/F • The behavior of long-run cost still depends on the firm's production function.

True

t/F An increase in a fixed cost shifts the total cost (TC ) and average total cost (ATC ) curves upward but does not shift the marginal cost (MC ) curve

True

AVC

VC/Quantity of output

When firm makes zero economic profit, it is called

a break even point

A sunk cost is

a cost incurred by the firm and cannot be changed

To increase output in the long run,

a firm can change its plant as well as other factors

To increase output in the short run,

a firm must increase the amount of labor employed

The short run

a time frame in which the quantity of one or more resources used in production is fixed

Total cost is the cost of

all resources used

the law of diminishing returns states that:

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

When MP equals AP, AP is

at its maximum

The total product curve separates

attainable output levels from the unattainable output levels in the short run

diminishing marginal returns arises

because each additional worker has less access to capital and less space in which to work

Fixed factors in the short run

capital, land and entrepreneurship

Diseconomies of scale occur due to

coordination problems in large organizations

when MP is below AP, AP

decreases

Diseconomies of scale is also called

decreasing returns to scale

When a new technology becomes available, the ATC and MC curves shift

downward

Market demand curve is ________

downward sloping

In the long run in a perfect competition market, the number of firms in the market can change due to

entry & exit

Diminishing marginal returns

eventually the marginal product of a worker is less than the marginal product of the previous worker the firm experiences diminishing marginal returns

If a technological advance results in the firm using more capital and less labor,

fixed costs increase and variable costs decrease

the firm's demand curve is _________

horizontal

The total product curve shows

how total product changes with the quantity of labor employed

Increasing marginal returns arise from

increased specialization and division of labor

The___________curve is the relationship between the lowest attainable average total cost and output when both the plant and labor are varied.

long-run average cost curve

If TC > TR, or ATC > P, firm incurs a _______

loss

At minimum AVC, the firm incurs a

loss equal to total fixed cost

ATC increases at ____ output levels and decreases at ______ output levels

low, high

Diseconomies of scale occur when

management becomes stretched

A firm's demand curve is also the ________

marginal revenue curve

The _______ shows the quantity supplied by all firms at each price when each firm's plant and the number of firms remain the same in the short run

market supply curve

the shutdown point is at ______

minimum AVC

AVC is at its ________ at the same output level at which AP is at its ___________

minimum, maximum

MC is at its _______ at the same output level at which MP is at its ___________

minimum, maximum

In the long run, a firm in the perfect competition market can

only break even because firms can enter or exit the market

Marginal product of labor curve

passes through the midpoints of the labor bars

A horizontal demand curve illustrates a _______

perfectly elastic demand curve

more sellers that enter the market in a perfect competition push

price down and drive away the room for positive profit

A________is a firm that cannot influence the price of a good or service. No single firm can influence the price—it must "take" the equilibrium market price.

price taker

More sellers that leave the perfect competition market, move the

price up and drive away loss

In a perfectly competitive market, firm cannot decide the ______ but can decide ______

price, output level

Workers in economies of scale,

produce more efficiently when focusing on a specialized task

The firm makes many decisions to achieve its main objective:

profit maximization

The size of the production process is

scale

a firm's _______ is the price and quantity at which it is indifferent between producing output and shutting down

shutdown point

If the firm expects the loss to be temporary, it will

stay in the market Has to decide whether to produce something or to shut down temporarily

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

technology and prices of factors of production

Law of diminishing returns is the property where

the MP of an input declines as the quantity of that input increases

Define MR

the change in TR that results from selling one more unit of a good

Average total cost is

the cost of a typical unit of output produced

Fixed Cost is

the cost of the firm's fixed inputs

Variable Cost is

the cost of the firm's variable inputs

If the business is expected to grow,

the firm can ramp up production

If the business is faltering,

the firm can scale back its operation

Fixed factors are called

the firm's plant

Marginal Cost is

the increase in Total Cost that results from a one unit increase in total product

Where is minimum AVC?

the point where the MC curve crosses the AVC curve

All decisions can be placed in two time frames:

the short and long run

the average product of labor is equal to

the total product divided by the quantity of labor employed

If the firms in the market make economic profit,

they attract new firms, market supply shifts to the right P falls and reduces profit

Marginal product of labor is the change in

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

T/F • The behavior of long-run cost still depends on the firm's production function.

trie

T/F An increase in a variable cost shifts the total cost (TC ), average total cost (ATC ), and marginal cost (MC ) curves upward.

true

T/F An increase in the price of a factor of production increases costs and shifts the cost curves

true

T/F Cost Curve Over the output range with diminishing marginal returns, the marginal cost rises as output increases

true

T/F Cost Curve The AFC curve decreases as output increases

true

T/F Cost Curve The MC curve decreases first but eventually will increase

true

T/F Cost Curve both the ATC and AVC curves are U-shaped, which means the curve falls to a minimum point, then increases

true

T/F diminishing marginal returns are so pervasive that they are elevated to the status of a law

true

T/F other decisions are easily reversed and are less critical to the survival of the from, but still influence profit

true

T/F short run decisions are easily reversed

true

T/F some decisions are critical to the survival of the firm

true

T/f VC do change with the quantity of input

true

Market supply curve is ____________

upward sloping

In the long run firms in the perfect competition market will only make

zero economic profit


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