Micro Chapter 7

Properties of Isoquants

1. Isoquants farther from the origin represent greater output rates 2. Isoquants have negative slopes because along a given isoquant, the quantity of labor employed inversely relates to the quantity of capital employed 3. Isoquants do not intersect because each isoquant refers to a specific rate of output 4. Isoquants are usually convex to the origin

Constant Long Run Average Cost

A cost that occurs when, over some range of output, long run average cost neither increases nor decreases with changes in firm size

Long Run Average Cost

A curve that indicates the lowest average cost of production at each rate of output when the size, or scale, of the firm varies; also called the planning curve

Isoquant Curve

A curve that shows all the technologically efficient combinations of two resources, such as labor and capital, that produce a certain rate of output

Implicit Cost

A firm's opportunity cost of using its own resources or those provided by its owners without a corresponding cash payment

Economic Profit

A firm's total revenue minus its explicit and implicit costs

Accounting Profit

A firm's total revenue minus its explicit costs

Long Run

A period during which all resources under the firm's control are variable

Short Run

A period during which at least one of a firm's resources is fixed

Efficient (Pareto efficient)

A situation is _______ if no change is possible that will help some people without harming others

Invisible Hand Theory

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources

Economic Loss

An economic profit that is less than zero

Barrier to Entry

Any force that prevents firms from entering a new market

Variable Cost

Any production cost that changes as the rate of output changes

Fixed Cost

Any production cost that is independent of the firm's rate of output

Variable Resources

Any resource that can be varied in the short run to increase or decrease production

Fixed Resource

Any resource that cannot be varied in the short run

Law of Diminishing Marginal Returns

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

Allocative Function of Price

Changes in prices direct resources away from overcrowded markets and toward markets that are underserved

Rationing Function of Price

Changes in prices distribute scarce goods to those customers who value them most highly

Diseconomies of Scale

Forces that may eventually increase a firms average cost as the scale of operation increases in the long run

Economies of Scale

Forces that reduces a firm's average cost as the scale of operation increases in the long run

Isocost Line

Identifies all combinations of capital and labor the firm can hire for a given total cost

Production Function

Identifies the maximum quantities of a particular good or service that can be produced per time period with various combinations of resources, for a given level of technology. Can be represented as an equation, graph, or table

Explicit Cost

Opportunity cost of resources employed by a firm that takes the form of cash payments

Economic Rent

That part of the payment for a factor of production that exceeds the owner's reservation price, the price below which the owner would not supply the factor

Normal Profit

The accounting profit earned when all resources earn their opportunity cost

Explicit Costs

The actual payments a firm makes to its factors of production and other suppliers

Marginal Product

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant

Accounting Profit

The difference between a firm's total revenue and its explicit costs

Economic Profit (Excess Profit)

The difference between a firm's total revenue and the sum of its explicit and implicit costs

Expansion Path

The line formed by connecting tangency points

Increasing Marginal Returns

The marginal product of a variable resource increases as each additional unit of that resource is employed

Normal Profit

The opportunity cost of the resources supplied by a firm's owners, equal to accounting profit minus economic profit

Implicit Costs

The opportunity costs of the resources supplied by the firm's owners

Marginal Rate of Technical Substitution

The rate at which labor substitutes for capital without affecting output

Production Function

The relationship between the amount of resources employed and a firm's total product

Total Cost

The sum of fixed cost and variable cost or TC=FC+VC

Total Product

The total output produced by a firm

Average Total Cost

Total cost divided by output or ATC=TC/q pr ATC=AFC+AVC

Average Variable Cost

Variable cost divided by output or AVC=VC/q