Economics cost table formulas – Flashcards
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AVC =
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TVC/Q or ATC-AFC
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Tc=
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TFC+VC or ATC * Q
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AFC =
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TFC/Q or ATC-AVC
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MC =
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change in TC / change in Q or change in TVC/ change in Q
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TFC =
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TC-TVC or AFC*Q
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ATC =
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TC/Q or AFC + AVC
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TVC =
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TC - TFC or AVC *Q
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1. What is meant by utility? ... isoutility?
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Satisfaction & equal satisfaction
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1. What is meant by marginal utility?
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the benefit gained from consuming one additional unit of a good or service:
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1. What is the formula for marginal utility?
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Change in TUx/change in Qx Marginal Utility = Change in total utility / Change in number of units consumed
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1. What is the formula for a budget constraint if only two goods may be purchased?
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I=PxQx+PyQy
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1. What is the slope of the budget constraint?
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Px/Py
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1. What is the slope of the isoutility curve?
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Mux/Muy (negative slopes)
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1. What are the characteristics of an isoutility curve?
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1. Equal Satisfaction 2. Can not cross 3. Higher curves are preferred to lower curves 4. Slopes are negative 5.Shape of curve refers to the law of diminishing marginal utility
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1. What is meant by "intransitivity"?
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That is when isoutility curves cross. Where A>B & B>C but C>A If product X is preferred to product Y and product Y is preferred to product Z, then it follows that product X is preferred to product Z.
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What is the formula for consumer equilibrium? ... producer equilibrium?
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1. MUx/Px=MUy/Py (marginal utility of good x over price of good x) MPL/PL=MPK/PK (where MP= marginal product, L= labor, K= capital)
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What happens to a budget constraint when the price of one good changes? ... when more income is received?
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A) results in a rotation of the budget constraint. B) results in a parallel shift to the budget constraint.
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How are the vertical and horizontal intercepts of a budget constraint determined?
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Vertical: I/Py Horizontal: I/Px
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How can an individual's demand curve for a good be determined using isoutility curves and budget constraints?
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The demand curve can be derived from the indifference curves and budget constraints by changing the price of the good. For example, if the price of pizza is $4, the quantity demanded of pizza is two. If the price of pizza decreases, the budget constraint becomes flatter and the consumer can purchase more pizza, say the price of pizza drops to $2 and consumer purchases 4 units. If the price drops to $1.33, the quantity demanded increases to 5. Plotting each of the price and quantity demanded points creates the demand curve for pizza.
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What is meant by the law of demand?
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If the price of a good drops, the demand will increase and vice versa.
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What is meant by production?
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The producing of the output.
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What is the formula for a Cobb-Douglas Production Function?
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Q=f(K,L) Where: - Q is the quantity of products, which is the function of K,L. - L the quantity of labor applied to the production of Q, for example, hours of labor in a month. - K the hours of capital applied to the production of Q, for example, hours a machine has been working for the production of Q.
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1. What is meant by returns to scale?
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This is when all inputs increase by a constant factor ; output increases by the same proportional change that is constant returns to scale.
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How can a Cobb-Douglas Production function be used to determine returns to scale?
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If the inputs increase by the same amount as output then it is a return to scale.
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What is meant by the marginal product of labor (MPL)?
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The increase in the amount of output from an additional unit of labor.
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What is meant by the marginal product of capital (MPK)?
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The increase in the amount of output from an additional unit of capital.
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How can a Cobb-Douglas Production Function be used to calculate MPL ; MPK?
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MPL=?Q/?L, MPK=?Q/?K
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How does a short-run production function differ from a long-run production function (graphically)?
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In a short run production function, capital is held constant. In a long run production function, both capital and labor are held constant. Short run: at least 1 fixed input. Long run: can be all variable inputs. Suppose Q = A K^B L^C; then MPK = BA K^(B-1) L^C; and MPL = CA K^B L^(C-1). For example: If Q=100 K^.6 L^.4; then MPK = 60 K^-.4 L^.4; and MPL = 40 K^.6L^.6. (Potential bonus question)
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1. What is meant by "isoquant"?
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Equal output
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How does "isoquant" differ from "isoutility"?
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Isoquants can bend inward. An isoquant shows the various combination of two inputs (capital and labor) on an equal output, while an isoutility curve shows the various combinations of two commodities; good x and good y
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What is meant by the law of diminishing marginal utility?
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law of diminishing marginal utility states that the marginal utility of a good or service declines as its available supply increases. That is, the additional satisfaction gained from consuming more of a product reduces as we consume more units of that product. As Q increases there is a decrease in your utility. (Total utility can become negative)
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What is meant by the law of diminishing marginal product?
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the marginal product of an input declines as the quantity of the input decreases.
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How does the concept in #24 differ from that of #25 (above)?
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diminishing marginal utility is related to a consumer. The law of diminishing marginal productivity is related to a producer.
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1. What are the three stages of production in a short-run production function?
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• Increasing at an increasing rate Increasing at a decreasing rate decreasing
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1. What is the formula for MPL? ... APL?
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MPL: change in Q/change in L APL: Q/L
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1. How do MPL and APL relate to the cost curves?
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TP is the reverse of TVC ; TC. TP has the height of TVC and TC and the height of TFC
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What ways can production be related to cost?
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Cost of production? TC and TVC have the same shape
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What are meant by fixed costs? ... variable costs?
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fixed) Costs that do not change due to output production. (i.e. rent, utilities, insurance, salaries, etc.) variable) Costs that do vary with output. If output is 0, variable costs are 0. (i.e., if you own a coffee shop variable costs are coffee, sugar, cups, milk, etc.)
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What are the formulae for TC? TFC? TVC?
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TC=TFC+TVC ; TC=ATC*Q TFC=TC-TVC ; TFC=AFC*Q TVC=TC-TFC ; TVC=AVC*Q
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What are the formulae for ATC? AFC? AVC?
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ATC=AFC+AVC ; ATC=TC/Q AFC=ATC-AVC ; AFC=TFC/Q AVC=ATC-AFC ; AVC=TVC/Q
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What are the formulae for MC? ...MR?
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MC=change in TC/change in Q ; change in TVC/change in Q. MR=change in TR/change in Q
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What is the formula for profit maximization?
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MR=MC
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What is the formula for cost-minimization of all inputs?
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MPK/PK = MPL/PL
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What is known about TC and TFC when output is equal to zero? Why?
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TC=TFC (On 0, No: AFC, MC, AVC, ATC)
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In terms of types of cost, what things are equal when output is equal to zero? ...to one?
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In the long run, total cost is equal to zero when output is equal to zero.
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1. What are the shapes of TC, TFC, and TVC?
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(question mark
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What is the shape of MC?
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nike check mark
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How does MC relate to ATC and AVC ?
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MC crosses ATC at its minimum point.
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How is a long-run ATC curve derived?
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It envelopes the short run curves. (Just outside of it)
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What is meant by "lumpy facilities"?
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referring to the shape of a long-run ATC curve (which outlines smaller short run ATC curves giving it a "lumpy" look to the graph means to go from one plant size to the next you must make incremental changes (as opposed to a huge leap)
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What is meant by increasing returns to scale?
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If output increases by more than the proportional change.
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1. How does returns to scale differ from economies of scale?
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Returns to Scale: No changes in ATC (constant ATC); Economies of Scale: reduction in ATC as the firm expands the size of its output in the long run
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What are the reasons for economies of scale?
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Specialization, Geometric Growth, Managerial Specialization, Increased Use ; capital equipment.
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What is meant by MES?
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Minimum Efficient Scale is the minimum point of a LR ATC curve.
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1. What are the formulae for profit?
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Profit=TR-TC ; Profit=Q * (P-ATC)
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What is meant by MR and MC?
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marginal revenue ; marginal cost) MR=MC means profit maximization
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What should a profit-maximizing firm do if MR;MC? MR;MC? MR=MC?
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-more output - less output - profit maximized
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1. What is the slope of TR? ... TC?
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TR=MR ; TC=MC
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1. What is meant by perfect competition?
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Firms approaching infinity. Ease of entry/exit into industry. Standardized product. Zero market power.
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What are the ways in which a market structure can be characterized?
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1) # of firms. 2) Type of product 3) Degree of market power 4) Ease of entry/exit to/from industry 5) Buzzwords 6) Graphs
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What is the formula for "economic profit"? ... normal profit? ...loss-minimization? ...shutdown?
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Economic Profit = P;ATC Normal Profit P=ATC Less-Minimization = AVC; P ; ATC Shutdown=P;AVC;ATC
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What determines whether a firm should shut down or continue to operate at a loss?
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If Profit is greater than AVC operate at a loss.
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In terms of high-fixed cost or low fixed cost firms, what types of firms are more likely to shutdown?
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high
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In the short run, a firm must be able to cover which type of cost in order for it to make sense for the firm to operate?
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low
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What are the types of market structures?
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Monopoly, duopoly, oligopoly, monopolistic competition, perfect competition.
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What is meant by monopoly? ...duopoly? ...oligopoly? ...monopolistic competition?
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Monopoly - one firm. Duopoly - two firms. Oligopoly - few. Monopolistic competition - many. perfect competition - firms approaching infinity.
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What is meant by a price-taker? ... price maker?
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Taker-perfect competition. price-maker -monopoly
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How is the demand curve for a firm in perfect competition determined?
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Market supply
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What are the various things that the demand curve for a PC firm equals?
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D=AR=MR=P
