Microeconomics - Chapter 6

Production

1. The process of creating goods and services 2. a factor of production is an input used in the production of a good or service 3. the short run is a period of time during which at least one of the firm's factors of production is fixed 4. the long run is a period of sufficient length in which all inputs are variable

Production in the Short Run

1. a perfectly competitive firm has to choose how much to produce 2. labor is a variable factor (it changed in the short run) 3. must determine the profit maximizing level of output

Shut-down Condition

1. if the firm shuts down, in the short run, it loses all its fixed costs 2. firm should shut down if P*Q < VC 3. if the firm's revenue is at least as big as variable cost, the form should continue to produce

Perfectly Competitive Firms' Demand

1. market supply and demand set the price 2. perfectly competitive firms can sell all they want at the market price 3. imperfectly competitive firms have some control over price

Law of Supply

1. short-run marginal cost curves have positive slope 2. in the long run, all inputs are variable 3. the perfectly competitive firm's supply curve is its marginal cost curve

Increases in Supply

1. technology - more output, fewer resources 2. input prices - decreases costs 3. number of suppliers - more suppliers in the market 4. expectations - lower prices in the future 5. price of other products - lower prices for alternative products

Profit Maximizing and Fixed Costs

1. the profit maximizing quantity does not depend on fixed costs 2. a firm should increase output only if the extra benefit exceeds the extra cost 3. the extra benefit is the price 4. the extra cost is the marginal cost - the amount by which total cost increases when production rises 5. the competitive firm produces where price equals marginal cost 6. when diminishing returns apply, marginal cost rises as production increases

Shut down if...

P*Q < VC P < VC/Q P < AVC

Profitable Firm

a firm is profitable if its total revenue is greater than its total cost (TR > TC)

Producer Surplus

amount by which price exceeds the seller's reservation price

Producer Surplus on a Graph

area above the supply curve and below the market price

Marginal Cost

change in total cost divided by change in output

Shut-down Decision

continue to operate if your losses are less than if you shut down, shut down if your losses are less than if you continued operating

What is based on the cost benefit principle?

decision making

At low levels of production, the law of diminishing returns may not hold...

gains from specialization and similar to the increase in a buyer's marginal utility from a second unit

Profit Maximization

goods and services are produced by different organizations with different motives (profit maximizing firms, nonprofit organizations, and governments)

Total cost is made up of...

implicit and explicit costs

Economists assume the goal of the firm is to...

maximize profit

Supply Curves with Positive Slopes

principle of increasing opportunity costs (marginal costs increases and higher prices bring new suppliers)

Perfectly Competitive Firms

standardized products, many buyers and sellers (price takers), informed buyers and sellers, and mobile resources

Total Cost

sum of all payments for all inputs

Fixed Cost

sum of all payments for fixed inputs

Variable Cost

sum of all payments for variable inputs

How is productivity measured?

the time it takes a worker to produce a good

Average Total Cost

total cost divided by total output

Profit

total revenue minus total cost

Average Variable Cost

variable cost divided by total output

Law of Diminishing Return

when some factors of production are fixed, increased production of the good eventually requires even larger increases in the variable factor