question

Industrial organization

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the study of how firms' decisions about prices and quantities depend on the market conditions they face.

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Total revenue is

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The amount that the firm receives for the sale of its output. Revenue ($)= Price ($/unit) * Quantity Sales (Units)

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Total cost.

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The amount that the firm pays to buy Inputs (flour, sugar, workers, ovens, and so forth).

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Profit

answer

Total revenue - Total Cost

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Opportunity cost is

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The cost of loosing income from something that you give up to get other.[Give up the chance to gain from putting money in the bank to gain interest or teaching instead of making cookies instead of making cookies]

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explicit costs

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input costs that require an outlay of money by the firm. All the cost that you have to pay to run the manufacturing or services.

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implicit costs

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input costs that do not require an outlay of money by the firm. [It usually is the revenue gain from doing something else that you have given up]

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The total cost is the sum of

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for Economist: the explicit costs and the implicit costs. for Accountant: the explicit costs only.

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Accountant vs. Economist

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Accountants measure explicit cost whereas Economist measures both implicit and explicit costs.

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An important implicit cost of almost every business is

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opportunity cost of the financial capital that has been invested in the business. Instead of investing in business, the capital can be invested in something else.

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economic profit equals to

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the firm's total revenue minus all the opportunity costs (explicit and implicit) of producing the goods and services sold.

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accounting profit equals to

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the firm's total revenue minus only the firm's explicit costs.

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Accounting profit is usually ____ than economic profit.

answer

larger, because accountant does not measure lost of revenue from using the capital or manpower to do other things.

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Economic profit is an important concept because

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it is what motivates the firms that supply goods and services. It help investor making right decision. [instead of making cookies, you can put money in the back and use the time to teach if the revenue gain from interest in the bank + teaching revenue are more than accounting profit made from making cookies, in this case economic profit is negative, while accountant profit may show profit from making cookies]

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The production function is

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The relationship between the quantity of inputs (workers) and quantity of output (cookies). Y-Axis is Output in Units/Time. X-Axis is Input in Hours of Labor or Machine.

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Marginal product of any input in the production process is

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the increase in the quantity of output [units or units over a fixed time] obtained from one additional unit of that input. (unit could be labor or machine or others)

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Diminishing marginal product

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the property whereby the marginal product declines as the quantity of the input increases. (less efficiency)

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Slope of the production function measures

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Marginal Product Rise = Y axis = Output (units or units/time) Run = X axis = Input (labor or machine - hours) Rise over Run = Additional Output (or marginal product or the next additional unit produced) over Additional Input (additional hour or labor or machine)

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average total cost

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Total cost divided by the quantity of output Average total cost = Total cost/Quantity ATC = TC/Q or = average fixed cost + average variable cost

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Marginal cost

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= Change in total cost/Change in quantity MC = ?TC/?Q

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Average total cost tells us the cost of a typical unit of output, where as Marginal Cost tells us the

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increase in total cost that arises from producing an additional unit of output.

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Cost curve characteristics

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1) starts off from Y intersect at fixed cost. 2) slope upward as input increase 3) curve upward as production reach diminishing marginal product output

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the efficient scale is at

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The bottom of the U-shape Cost Curve occurs at the quantity that minimizes average total cost. or.. the output level where the marginal-cost curve crosses the average-total-cost curve at its minimum

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Whenever marginal cost is less than average total cost, average total cost is

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falling

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Whenever marginal cost is greater than average total cost, average total cost is

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rising.

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Typical Cost Curve Characteristics 1

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Marginal Cost curve usually marginal product start to increase until division of tasks is fully realized then marginal product (additional output) starts to fall due to diminishing product hence Marginal Cost starts to climb. Average Variable Cost curve starts at the same point as Marginal Cost curve for the first unit produce and drop slightly and climb after the Marginal Cost start to increase

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Typical Cost Curve Characteristics 2

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Average Fix Cost Curve started from Y intersect of fixed cost at 0 output then start to fall steeply as more output average down the cost per unit.

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Typical Cost Curve Characteristics 3

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Average Total Cost = Average Fixed Cost + Average Variable Cost at each quantity output (along X axis) as a result. ATC curve has U shape with the lowest point intersecting marginal cost curve.

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In the long run all cost are

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variables. [within a span of 50 years, time to build a new factory may be 3 years, hence building a new factory becomes one of the variables as oppose to within 1-2 years, building a new factory to expand capacity is not possible.]

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ATC curve in long run is the envelope curve of many short run ATC curves.

answer

Long run ATC curve has a much flatter U shape curve as the company can have multiple short run curve within long span of times (building multiple plants in different sizes to sustain the lowest possible ATC)

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The firm has economies of scale is when

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long-run average total cost declines as output increases, which realizes by specialization among workers or machines or processes.

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When long-run average total cost rises as output increases, there are said to be

answer

diseconomies of scale, which is commonly causes by coordination problems as the organization starts getting to large to efficiently control.

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When average total cost does not vary with the level of output, there are said to be

answer

constant returns to scale

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