Econ Test 3

Total Cost

(Total Fixed Cost) + (Total Variable Cost)

Economic Profit

(Total Revenue, TR)- (Implicit Cost + explicit cost) Business operating decisions should be based on economic profit The level of profit that occurs when total revenue is greater than total cost A company can break even and meet operating costs without a loss when it earns zero economic profit Price > Average total cost

To determine how much output, a firm should produce to maximize its profit

1. the marginal cost 2. The marginal revunue 3. The extra benefit of producing the unit 4. The extra cost associated with producing an additional unit of output

Economies of Scale

A condition in which the long-run average total cost of production decreases as production increases result from 1. lower costs of inputs as firms purchases larger quantities 2. Productivity gains from specialized labor - ex: an increase in specialization of labor is a source of economies of sale for a firm

Diseconomies of scale

A condition in which the long-run average total cost of production increases as production increases Could exist if: 1. inputs are not as productive as the inputs used before 2. Cannot Perfectly replicate its production when it expands 3. One reason for diseconomies of scale is increasing opportunity costs

Constants return to Scale

A condition in which the long-run average total cost of production remains constant as production increases When the slope is horizontal on a graph

Short- run average total cost curve (ATC)

A curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity

Long- Run average total cost curve

A curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable

Perfect Competition

A market structure characterized by the interaction of large number of buyers and sellers, in which the sellers produce a standardized, or homogeneous, product. These sellers are price takers, can sell as much output as they choose to produce at the market price, and have the ability to easily enter or exit an industry In a perfectly competitive market, we assume the product is identical in the minds of CONSUMER Marginal Revenue = Price= Average The demand, the marginal revenue and the average revenue curves for a perfectly competitive firm are the same horizontal line at the market price

Long Run

A period of time in which all inputs of producing are variable The decision to exit an industry can be made only in the long run In the long run perfectly competitive firms achieve productive and allocative efficiency

Average Total Cost

ATC = TC/Q (Total Cost per unit) or AFC+AVC

Average Product

Amount of output produced per unit of a resource employed The average amount of output produced per unit of a resource employed; Total product / number of of units or resource employed

Average Revenue

Amount of revenue per unit of a product Revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold

Allocative Effciency

By responding to changes in market price, competitive firms produce more of the products we value most and fewer of the products we value least to achieve allocative efficiency

Variable cost

Cost that change with the amount of output produced changes in the variable cost can affect the marginal cost face by firms

Economic costs

Costs associated with the use of resources the sum of explicit and implicit costs EC = Explici Costs + Implicity Cost

Fixed Costs

Costs that do not change with the amount of output produced Even when a firms shuts down in the short run it must still pay the FIXED costs

Prices Takers

Firms that take or accept the market price and have no ability to influence that price

Price Takers

Firms that take or accept the market price and have no ability to influence that price In a perfectly competitive market the price the firm should charge is the market price because the firm is a price taker

Homogeneity

It means that firms must charge the market price for the goods or services they produce because there are hundreds of other perfectly good substitutes and the market is competitive

Explicit Cost

Monetary payments made by individuals, firms, and governments for the use of others land, labor Also known as Accounting costs My Term: outsourcing for something you don't own

Monopolies

Monopolies create market inferences, so governments must limit their market power or eliminate them entirely

Productive Efficenty

Producing output at the lowest possible average total cost of production; using the fewest resource possible to produce a good or service

Market Price

The demand for a perfectly competitive firm's product is a horizontal line originating at the market price as a market price of a good increase all held constant, a profit-maximizing firm that produces the good can afford to expand its production

Marginal Cost

The extra or additional cost associated with the production of an additional unit of output when the marginal product increases the marginal cost of production declines The Shape of the Marginal Cost curve is dependent on the Law of diminishing marginal returns MC= Change in total cost/ change in output will cause the average cost to rise only if the marginal cost is rising can only equal the average cost when the marginal cost is rising Change in total cost/ Change in output or Change in total variable cost/ change in output

Shut down Point

The price below which a firm will choose not to operate in the short run. Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost. Graphically, this point occurs where the price or marginal revenue curve, intersects the marginal cost curve at the minimum point of the average cost curve AVC

Total Product

The total amount of output produced with a given amount of resources

Total Profit

Total Profit= (Average Revenue- average total cost) x Output For a frim, profit equals Total Revenue- Total Cost

Accounting Profit

Total Revenue minus the explicit costs of production TR- Explicit Costs

Average Cost

When the marginal Cost falls below the average cost, the average cost should be decreasing

Increasing Marginal returns

a characteristic of production whereby the marginal product of the next unit of variable resource utilized is greater than that of the previous variable resource

Perfectly Competitive Firm

a perfectly competitive firm should produce output until marginal cost equals marginal revenue The demand for a perfectly competitive firm's product is a horizontal line originating at the market price Producers who are price makers is a not a characteristic of perfect competition Characteristics: 1. a larger number of buyers and sellers 2. producers who are prices takers 3. easy entry and exit Market price is equal to average revenue, marginal revenue, and demand

Marginal Product

additional output produced as a result of utilizing one more unit of a variable resource

Negative Economic Profit

encourage firms to exit market

Positive economic Profit

encourages more firms to enter the market to produce goods and services

Profit Maximazation

implies that perfectly competitive firms should expand production up to the point where marginal revenue = marginal cost

Total revenue

price times quantity (P x Q)

Loss

the level of profit that occurs when total revenue is less than total cost example: Last year Dave's Furnace Repair earned total revenue of 330,200 but due to increased health care costs, face a total cost 392.000 for a loss of 61,800

Zero Accounting Profit

the value of economic profit is negative

Average Fixed Cost

The fixed cost per unit the vertical distance between the average variable cost, AVC, and the average total cost, ATC AFC= ATC-AVC It will decline as a firm produces more output

Normal Profit

The level of profit that occurs when total revenue is qual to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is the same as zero economic profit

Minimum- Efficiency Scale

The lower level of output at which the long-run average total cost is minimized

Diminishing Marginal Returns

The marginal product of the next unit of a variable resource utilized is less than that of previous variable resource

Long -Run Equilibrium

The market condition in which firms do not face incentive to enter or exit the market and firms earn a normal profit. Generally occurs when the market price is equal to the minimum average total cost faced by firms

Short Run

a period of time in which at least on input of production is fixed In a short run, as the price rises so does the level of output supplied The decision to shut down temporarily is a short-run decision In the short run, the supply curve for a firm is the marginal cost curve above or equal to the average variable cost curve If the firm were to shut down in the short run the loss will equal to the total fixed cost

Marginal Revenue

additional revenue associated with the sale of an additional unit extra or additional revenue associated with the production of an additional unit of output is marginal revenue The Change in a firm's total revenue that results from a 1 unit change in output produced and sold

Oppertunity cost

The oppertunity cost of using owned resources are implicit costs

Implicit Cost

The opportunity costs of using owned resources costs for which no monetary payment is explicitly made My Term: Sourcing from something you own or operate including your own intelligence and money