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a time period long enough for a firm to change the quantity of all its inputs. -> Over the ________ all the inputs the firm uses are viewed as variable inputs.

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Short Run versus Long Run decisions: Long Run-

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input that can be adjusted up or down as the quantity of output changes

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Variable Input-

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time period during which at least one of the firms inputs is fixed

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Short Run-

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input whose quantity must remain constant

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Fixed Input-

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Maximum quantity of output that can be produced from a given combination of inputs

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Production in the short run: Total Product-

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Change in total product (change In Q) divided by the change in the number of workers employed (change in L) -> MPL= change in Q /change in L ---> MPL tells us the rise in output produced when one more worker is hired

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Marginal Product of Labor (MPL)-

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When the marginal product of labor rises as more workers are hired -> each time a worker is hired total output rises by more than it did when the previous worker was hired

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Marginal Returns in Labor: When are there Increasing marginal returns to labor?

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-Additional workers may allow production to become more specialized. ---> Output still rises when another worker is added, so marginal product is positive. But the rise in output is smaller and smaller with each successive worker.

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Why might increasing marginal returns of labor might happen?

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-The marginal product of labor decreases as as more labor is hired. -> When the marginal product of labor is decreasing, we say that there are ________________. -Apply not just to labor but to any variable input -> In all kinds of production, if we keep increasing the quantity of any one input, while holding the others fixed __________________ will eventually set in.

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Diminishing marginal returns to labor-

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states that as we continue to add more of any one inout (holding the others inputs constant), its marginal product will eventually decline.

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Law of diminishing (marginal) returns-

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the marginal product of labor will- begin to come down

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EX: If a farmer keeps adding additional pounds of fertilizer to a fixed amount of land, the yield may continue to increase, but eventually the size of the increase-

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cost that has been paid or or must be paid, regardless of any future action being considered - sunk costs should not be considered when making decisions

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Costs: Sunk Cost

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total costs of producing a given level of output -> everything they must give up in order to produce that amount of input

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Opportunity costs:

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Implicit and Explicit costs

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Types of Opportunity Costs:

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involve actual money payments

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Explicit Costs

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no money changes hands

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Implicit Costs

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Explicit Costs

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Rent Paid out, Interest On Loans, Managers salaries, Workers Wages, and Costs of raw materials are examples of?

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Implicit costs

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The OPPORTUNITY costs of Owners land and buildings (rent foregone), Owners Money (investment income foregone), and Owners time (labor income foregone) are all examples of?

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lease payments for the land on which a firm's factory stands

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An example of an explicit cost of production would be

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The costs of a firm's fixed inputs -> Rent and interest -whether explicit or implicit- are treated as _________, since producing more or less output in the short run will not cause any of these costs to change.

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Costs in the short Run: Fixed Costs-

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The costs of obtaining the firm's variable inputs -> These costs will rise as output increases. EX: Wages and the costs of raw materials.

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Variable Costs

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The cost of all inputs that are fixed in the short run. Like the quantity of fixed inputs themselves, fixed costs remain the same no matter what the level of output.

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Three measures of costs: Total Fixed Costs(TFC)-

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The cost of all variable inputs.

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Total Variable cost (TVC)-

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the sum of all fixed and variable costs: TC= TFC+ TVC

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Total cost (TC)-

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firms cost per unit of output

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Averages Costs:

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total cost divided by the quantity (Q) of output: -> AFC= TFC/Q ... Fall as input rises.

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Three measures of Average Costs: Average fixed Costs (AFC)- AFC will always_______...

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cost of the variable inputs per unit of output: -> AVC=TVC/Q - The AVC first decreases then increases.

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Average Variable Costs (AVC)- What happens to AVC as output rises ?

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total costs per unit of output: ATC= TC/Q

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Average total costs (ATC)-

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change in total cost (change in TC) divided by the change in output (change in Q): MC= change in TC/ change in Q -tells us how much costs rises per unit increase in output

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Marginal Costs:

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MC falls

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When MPL rises...

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MC rises

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When MPL falls...

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It will fall and then rise. Thus, the MC curve is U-Shaped

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Since MPL ordinarily rises and then falls, MC will do the opposite:

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In the long run, there are not fixed inputs or fixed costs; all inputs and all costs are variable. The firm must decide what combination of inputs to use in producing any level of output. ->To produce any given level of output, the firm will choose the input mix with the lowest cost.

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Production and Cost in the Long Run

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The cost of producing each quantity of output when all inputs are variable and the least-cost input mix is chosen.

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Long-run total cost (LRTC)

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The cost per unit of producing each quantity of output in the long run, when all inputs are variable. -> LRATC= LRTC/Q

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Long-run average total cost (LRATC)

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LRTC is less than or equal to TC

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Relationship between long and short run costs: The long-run total cost of producing a given level of output can be less than or equal to, but not greater than, the short-run total cost.

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LRATC is less than or equal to ATC

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The long-run average cost of producing a given level of output can be less than or equal to, but not greater than, the short-run average total cost.

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the firm can change the size of its plant

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In the long run

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the firm is stuck with its current plant

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In the Short run

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Long run average total cost decreases as output increases. ->When long run total cost rises proportionately less than output, production is characterized by economies of scale, and the LRATC curve slopes downward.

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Economies of scale

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hen long run total cost rises more than in proportion to output, there are diseconomies of scale, and the LRATC curve slopes upward.

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Diseconomies of scale

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When both output and long run total cost rise by the same proportion, production is characterized by constant returns to scale, and the LRATC curve is flat (the long run average total cost is unchanged as output increases).

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Constant Returns to Scale

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all the characteristics of a market that influence the behavior of buyers and sellers when they come together to trade.

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market structure

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1. How many buyers and sellers are there in the market? 2. Is each seller offering a homogeneous product, more or less indistinguishable from that offered by other sellers, or are there significant differences among the products of different firms? 3. Are there any barriers to entry or exit, or can outsiders easily enter and leave this market?

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To determine the structure of any particular market, we begin by asking three simple questions:

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Market structure with 3 important characteristics: 1. There are large numbers of buyers and sellers, and each buys or sells only a tiny fraction of the total quantity in the market. 2. Sellers offer a standardized product. 3. Sellers can easily enter into or exit from the market.

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What is perfect competition?

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it treats the price of its output as given.

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In perfect competition, the firm is a price taker:

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Total Revenue minus accounting costs

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Accounting Profit

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The proper measure of profit for understanding and predicting the behavior of firms ->recognizes all the opportunity costs of productions -both explicit costs and implicit costs.

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Economic Profit

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Tells us the quantity demanded by all consumers from all firms in a market.

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Market demand curve

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tells us, for different prices, the quantity of output that customers will choose to purchase from that firm.

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demand curve facing the firm

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The total inflow of receipts from selling a given amount of output =PxQ

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Total revenue

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Total revenue divided by the amount of output. ___________ tells us how much revenue a firm receives for the typical unit sold. -> AR=TR/Q=Px Q/Q=P

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Average Revenue

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The change in total revenue from the sale of each additional unit of output -> For competitive firms, __________ equals the price of the good. -> MR=Change in TC/ Change in Q = P x Change in Q/ Change in Q = P

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Marginal revenue

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Two things to notice... When MR is positive, and increase in output causes total revenue to rise. Each time output increases, MR is smaller than the price the firm charges at the new output level. The answer for this lies in the firm's downward-sloping demand curve, which tells us that to sell more output, the firm must cut its price. ->Marginal revenue is therefore less than the price of the last unit of output. -> not the case for a perfectively competitive firm

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The Marginal Revenue and Marginal Cost Approach

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-An increase in output will always raise profit as long as marginal revenue is greater than marginal cost (MR > MC). -An increase in output will always lower profit whenever marginal revenue is less than marginal cost (MR MC, and decrease output when MR To maximize profit, the firm should produce the quantity of output where MR= MC.

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Using MR and MC to Maximize Profits

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states that a firm should take any action that adds more to its revenue than to its costs.

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marginal approach to profit

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In the short run, the firm must pay for its fixed inputs. But the firm can still make decisions about production. And one of its options is to shut down.

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The short-run and the shutdown rule

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In the short run, the firm should continue to produce if the total revenue exceeds total variable costs; otherwise, it should shut down

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Shutdown Rule:

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The answer is yes -if the firm would lose even more if it stopped producing and shut down its operation.

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Imagine a firm for which the TC curve lies above the TR curve at all levels of output. No matter what output level the firm produces, the firm suffers a loss -a negative profit. For this firm, the goal is still profit maximization. But now the highest profit will be the one with the least negative value. Profit maximization becomes loss minimization. Should this firm produce the output level with the smallest possible loss and suffer a loss?

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firm's operating cost, since the firm only pays these variable costs when it continues to operate.

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TVC

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Operating Profit (TR>TVC) -> It should not shut down because its operating profit can be used to help pay its fixed costs.

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If a firm, by staying open, can earn more than enough revenue to cover its operating costs, then it is making an...?

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Operating Loss (TRContinuing to operate only adds to the firm's loss, increasing the total loss beyond fixed costs. Therefore the firm should shut down.

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If the firm cannot even cover its operating cost when it stays open -that is, if it would suffer an..?

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a) A firm's total profit is graphically represented by the vertical distance between the TR and TC curves. b) Profit per unit: the revenue the firm gets on each unit minus the cost per unit. -> Profit per unit = P-ATC

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Measuring total profit

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As the price of output changes, the firm will slide along its MC curve in deciding how much to produce.

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The firm's short-run supply curve

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The price at which a firm is indifferent between producing and shutting down.

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The shutdown price

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A curve showing the quantity of output a competitive firm chooses optimally to produce at various possible prices.

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Firm's supply curve.

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A curve indicating the quantity of output that all sellers in a market will produce at different prices in the short run.

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Market supply

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competitive firms can earn an economic profit or suffer and economic loss. In perfect competition, the market sums up the buying and selling preferences of individual consumers and producers, and determines the market price. Each buyer and seller then takes the market price as given, and each is able to buy or sell the desired quantity.

answer

Short run equilibrium

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In the long run, new firms can enter a competitive market, and existing firms can exit the market.

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The long run Equilibrium

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Shows the relationship between market price and market quantity produced after all long-run adjustments have taken place.

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Long-run supply curve

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An industry in which the long-run supply curve is horizontal because each firm's costs are unaffected by changes in industry output.

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Constant cost industry

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An industry in which the long run supply curve slopes upward because each firm's LRATC curve shifts upward as industry output increases.

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Increasing cost industry

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An industry in which the long-run supply curve slopes downward because each firm's LRATC curve shifts downward as industry output increases.

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Decreasing cost industry

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Price changes that cause changes in production to match changes in consumer demand.

answer

Market signals

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