Ch. 11-15
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
