Econ Exam 3

what the perfect competition firm can control:

the number of units it produces and sells, which is a critical decision for the firm in order to maximize profits

Private Enterprise

the ownership of businesses by private individuals

conceptually, the long run can be illustrated by tracing out:

the path of a firm's short run average total cost curve

upward sloping section of the MC is:

the relevant section for production decision making

Total Cost

the sum of fixed and variable costs of production

Average Total Cost

total cost divided by the quantity of output (total cost = fixed + variable cost; therefore ATC= (FC+VC)/q OR ATC= TC/q)

Accounting Profit

total revenues minus explicit costs, including depreciation

Economic Profit

total revenues minus total costs (explicit plus implicit costs)

the continual lowering of average costs of production would not/cannot go on forever

true

average variable cost has a:

u-shape, this is because the firm may gain "economies" using more and more variable inputs

average total cost has a:

u-shaped curve, this is because the ATC curve is made up of both the AFC and AVC curve

Average Variable Cost

variable cost divided by the quantity of output (AVC = VC/q)

as a firm begins production, it generally has increasing returns in production as it employs more and more:

variable inputs- this will cause MC to initially fall

diminishing returns

what cause the MC curve to slope upwards, firms experience this in production from using more and more variable inputs

Long-run Equilibrium

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC

as the firm continues to increase through time, the minimum average total cost:

would flatten out, then eventually begin to rise

Diseconomies of Scale

the long-run average cost of producing each individual unit increases as total output increases

Entry

the long-run process of firms entering an industry in response

Exit

the long-tun process of firms reducing and shutting down in response to industry loses

with each successive period of "short run", it is possible that the firm has discovered:

a new and better way to combine inputs, resulting in lower average total costs

production is best defined as:

creation of value, can take on many dimensions

When the path/trend of the short run ATC is falling (downward slope) we say the firm has:

economies of scale in production

the firm attempts to optimize the outcome of its efforts by:

engaging with the market in order to receive the largest "margin" between what comes in (sales or revenue) versus what goes out (expenses)

Assumptions of a Perfectly Competitive market

1- many firms in the market, selling an identical product 2- there are many buyers and sellers, so many buyers and sellers the no one buyer or seller can influence the market 3- all buyers and sellers in the market have the relevant information about the market 4- firms are free to enter or exit the market, there are no barrier to entry or exit

The decisions facing the firm

1- what good/service to produce? 2- how do we produce? what combination of inputs will achieve our objectives? 3- how much do we produce in various time periods? 4- what price do we charge that is competitive, but provides information to consumers and optimizes the objectives of the firm?

Constant Returns to Scale

expanding all inputs proportionately does not change the average cost of production

Fixed Cost

expenditure that must be made before production starts and that does not change regardless of the level of production (salaried employees, facilities space, overhead costs like liability insurance and employee benefits)

The planning curve has 3 distinct parts:

a downward sloping part, a flat part, and an upward sloping part

Price Taker

a firm in perfectly competitive market that must take the prevailing market price as given

for the PC firm, the MR is:

a horizontal line located at P (the market price)

the lowering of average costs would translate to:

a lower minimum ATC in subsequent periods of short run, this occurs as the firm expands its production facilities, adopts better technologies, etc.

"Map" of short run structure of costs that all firms face

all firms face a "u-shaped" ATC curve, all firms face a "u-shaped" AVC curve, all firms face an upward sloping MC curve

Production Technology

alternative methods of combining inputs to produce output

Firm

an organization that combines input of labor, capital, land, and raw or finished component materials to produce outputs

what causes a firm to gain economies?

as input are utilized in a more specialized fashion, which would increase overall productivity and therefore lower costs of production per unit

MC curve initial section

at low levels of production, downward sloping - means that the firm may experience increasing returns in production as it initially employs variable inputs

When does the ATC curve begin to rise?

at some point after the AVC begins to rise, the minimum of the ATC will be higher than the minimum of the AVC and will be positioned somewhat right in the minimum of the AVC because ATC includes AFC and AVC

the decisions the firm must make depend in large part on:

the market structure that the firm operates in

the firm must also pay attention to how its total costs are changing as it:

changes production and sales

When the path/trend of the short run ATC is not changing (flat slope) we say the firm has:

constant returns to scale in production

Variable Cost

cost of production that increases with the quantity produced (raw materials, some hourly workers) for the independent consultant, this would include materials needed to generate reports, his/her own time (interesting to note that for an independent consultant the most significant and practically only cost of production is an implicit cost, the alternative uses of the individuals own time)

relationship of AVC to ATC

curves look similar, but differences brought about from the fact that ATC includes AFC. ATC is above AVC, and starts from a higher vertical position As ATC is falling, it begins to approach AVC- this is because the amount of ATC attributed to AFC is declining (b/c AFC is always falling) ATC stays above AVC, and reaches its minimum point above and to the right of the minimum for AVC As both ATC and AVC rise, the curves converge (get closer together) without touching- again, this is because the share of ATC attributed to AFC continues to get smaller and smaller

When the path/trend of the short run ATC is rising (upward slope) we say the firm has:

diseconomies of scale in production

Perfect Competition

each firm faces many competitors that sell identical products

Oligopoly

few firms in the market, firms sell the same of different products

Average Fixed Cost

fixed costs / units produced (AFC = FC/q), is always and everywhere declining

the concept of production in microeconomics takes on a:

holistic meaning

Market structure parameters:

how much competition exists among the firms, what is the degree/nature of the competition (does competition occur mainly through price, quality, location, etc.), what are the barrier to enter and exit of firms?

one major problem a perfect competition firm has is:

it is a price taker, it does not have any control over the price it charges its customers

a pc firm cannot change its price, therefore its marginal revenue is:

just equal to the market price

Shutdown Point

level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately

the marginal cost curve:

looks somewhat like the Nike Swoosh emblem, its shape is related to a concept known as "diminishing returns to variable inputs"

Monopolistic Competition

many firms in the market, firms sell similar but different products in the market (I.e. each firm's product can be differentiated from other firms products)

the change in total cost as production changes

marginal cost

Monopoly

one firm in the market, firm sells a "unique" product in the market

Implicit Cost

opportunity cost of resources already owned by the firm and used in business, for example, expanding a factory onto land already owned

Explicit Cost

out-of-pocket costs for a firm, for example, payments for wages and salaries, rent, or materials

4 different market structures

perfect competition, monopolistic competition, oligopoly, monopoly

firm profit

profit = total revenue = total cost, which can be written as Profit = (price)x(quantity)-(average total cost)x(quantity) OR TT: (p)x(q)-(ATC)x(q)

objective of the firm in perfect competition is:

profit maximization; this means the firm is trying to find the selling conditions that lead to the greatest net amount between revenue and cost

Economies of Scale

refers to the situation where, as the quantity of output goes up, the cost per unit goes down

Long Run

shows the lowest possible average cost of production, allowing all the inputs to production to vary so that the firm is choosing its production technology, means when the firms has sufficient time to vary all production inputs, also considered a planning horizon for a firm

it is important to understand the the firm does NOT attempt to:

simply maximize its sales (Revenue) or minimize its expenses (cost)

what will happen to ATC initially?

the ATC will initially fall because AC is always falling and AVC is falling initially

Relationship of MC to ATC and AVC

the MC curve intersects both the ATC and AVC curves at their respective minimum points

Marginal Cost

the additional cost of producing one more unit, the change in total cost divided by the change in units produced (MC = ΔTC/Δq)

Marginal Revenue

the additional revenue gained from selling one more unit

Short Run

the average total cost curve in the short term; shows the total of the average fixed costs and the average variable costs, a period of production for a firm when it has at least one fixed input

Market Structure

the conditions in an industry, such as number of sellers, how easy or difficult it is for a new firm to enter, and the type of product that are sold

price taker

the firm must "take" the price that is determined in the overall market, or the whole collection of buyers and sellers

Profit Max Rule

the firm will always maximize profits or minimize losses if it produces and sells at the point where MR=MC

when we trace out the path of a firm's progression of Short Run ATC's, we derive something called:

the firm's "Planning Curve"