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In general, a firms profit equals:

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its total revenue- total cost

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explicit cost

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A cost that involves actually laying out money

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implicit cost

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The value of something sacrificed when no direct payment is made

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accounting profit

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total revenue minus total explicit cost. -reported on income tax reports

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economic profit

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total revenue minus total cost, including both explicit and implicit costs

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implicit cost of capital

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the opportunity cost of the capital used by a business; that is, the income that could have been realized had the capital been used in the next best alternative way.

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when someone earns negative economic profit it means:

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one should devote resources to next best alternative

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An economic profit of zero means that

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the firm could not do any better using its resources in any alternative activity.

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normal profit

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economic profit of zero

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optimal output rule

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profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

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Profit=

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TR-TC

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TR=

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PxQ

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principle or marginal analysis

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proceed until marginal benefit equals marginal cost.

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marginal revenue

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the additional income from selling one more unit of a good; sometimes equal to price

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marginal revenue=

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change in total revenue/change in quantity of output

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optimal output rule

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profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

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marginal cost curve is

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swoop shaped

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marginal cost is;

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the difference between the total costs of selected quanties (you divide by the difference in quantities)

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marginal cost curve is plotted..

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halfway between one and two, and so on

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marginal revenue curve is...

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STRAIGHT

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what produces goods or services for sale?

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a firm

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production function

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The relationship between quantity of inputs used to make a good and the quantity of output of that good

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fixed input

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an input whose quantity is fixed for a period of time and cannot be varied

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variable output

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is an input whose quantity the firm can vary at any time.

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total product curve

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shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

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total production curve shape...

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is going up but flattening

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marginal product of labor=

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change in quantity of output/quantity of labor

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marginal production

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has diminishing roots, goes down! straight

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there are diminishing returns to an input when

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an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

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product curve and the marginal product curve of the remaining input will shift when...

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you change the quantities of the other inputs

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fixed cost

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a periodic charge that does not vary with business volume (as insurance or rent or mortgage payments etc.)

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variable cost

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a cost that rises or falls depending on how much is produced

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total cost

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fixed costs plus variable costs

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TC=

answer

FC+VC

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total cost curve

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a graph that shows the relationship between total variable cost and the level of a firm's output

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marginal cost=

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change in total cost/change in quantity of output

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total cost curve...

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gets steeper as it goes from right to left

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average total cost

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total cost divided by the quantity of output

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marginal cost is

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the added cost of doing something one more time

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as output increases...

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marginal cost also increases because the marginal product of the variable input decreases.

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a u-shaped average total cost curve...

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falls at low levels of output and then rises at higher levels.

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average fixed cost

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Fixed cost divided by the quantity of output

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average variable cost

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variable costs divided by the quantity of output

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AFC=

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FC/Q

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AVC=

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VC/Q

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average fixed costs fall as...

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more output is produced because the numerator (the fixed cost) is a fixed number but the denominator (the quantity of output) increases as more is produced

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the spreading effect

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the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost.

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the diminishing returns effect

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The larger the output the greater the amount of variable input required to produce additional units leading to higher average variable cost

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At low levels of output, the spreading effect is

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very powerful because even small increases in output cause large reductions in average fixed cost (dominates the diminishing returns effect)

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Diminishing returns, however, usually grow increasingly important as

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output rises (when output is large, the diminishing returns effect dominates the spreading effect, causing the average total cost curve to slope upward.)

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At the bottom of the U-shaped average total cost curve,

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the two effects exactly balance each other. At this point average total cost is at its minimum level, the minimum average total cost.

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For a U-shaped average total cost curve,

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average total cost is at its minimum level at the bottom of the U

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At the minimum-cost output,

answer

average total cost is equal to marginal cost.

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At output less than the minimum-cost output,

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marginal cost is less than average total cost and average total cost is falling.

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And at output greater than the minimum-cost output,

answer

marginal cost is greater than average total cost and average total cost is rising.

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economists believe that marginal cost curves often slope downward as

answer

a firm increases its production from zero up to some low level, sloping upward only at higher levels of production: (check mark or j shaped)

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This initial downward slope occurs because a firm often finds that,

answer

when it starts with only a very small number of workers, employing more workers and expanding output allows its workers to specialize in various tasks. (salsa)

question

all inputs are____ in the long run

answer

variable

question

at high output levels, high fixed cost yields

answer

lower average total cost (adding the new machinery initially is non-benefical; in the long run it lowers ATC)

question

long-run average total cost curve

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shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

question

What determines the shape of the long-run average total cost curve?

answer

It is the influence of scale, the size of a firm's operations, on its long-run average total cost of production

question

Firms that experience scale effects in production find that their long-run average total cost

answer

changes substantially depending on the quantity of output they produce.

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economies of scale

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factors that cause a producer's average cost per unit to fall as output rises

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increasing returns to scale

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An increase in a firm's scale of production leads to lower costs per unit produced

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diseconomies of scale

answer

the property whereby long-run average total cost rises as the quantity of output increases

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decreasing returns to scale

answer

when long-run average total cost increases as output increases

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constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

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Economies of scale often arise from

answer

the increased specialization that larger output levels allow -a very large initial setup cost -network externalities

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diseconomies of sale typically arise...

answer

due to problems of coordination and communication

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sunk cost

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a cost that has already been committed and cannot be recovered (remember cost of break pads)

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system of market structure is based on two dimensions:

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the number of firms in the market (one, few, or many) whether the goods offered are identical or differentiated

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Differentiated goods

answer

are goods that are different but considered at least somewhat substitutable by consumers (think Coke versus Pepsi).

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In perfect competition,

answer

many firms each sell an identical product.

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In monopoly,

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a single firm sells a single, undifferentiated product.

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In oligopoly

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a few firms—more than one but not a large number— sell products that may be either identical or differentiated

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in monopolistic competition,

answer

many firms each sell a differentiated product

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price-taking firm

answer

A firm whose actions have no effect on the market price of the good or service it sells

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price-taking consumer

answer

a consumer whose actions have no effect on the market price of the good or service he or she buys

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when competition is perfect...

answer

every firm is a price taker

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perfectly competitive market

answer

a market in which no individual supplier has significant influence on the market price of the product

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perfectly competitive industry

answer

an industry in which producers are price-takers

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market share

answer

A company's product sales as a percentage of total sales for that industry

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an industry can be perfectly competitive if...

answer

it must contain many firms, none of whom have a large market share. if consumers regard the products of all firms as equivalent.

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standardized product

answer

Companies look for similarities among markets to offer a standardized product whenever possible. (sometimes called commodity)

question

free entry and exit

answer

when new producers can easily enter into an industry and existing producers can easily leave that industry

question

monopolist

answer

a firm that is the only producer of a good that has no close substitutes

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monopoly

answer

(economics) a market in which there are many buyers but only one seller

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barrier to entry

answer

Any factor that makes it difficult for a new firm to enter a market

question

four types of barrier to entry:

answer

control of a scarce resource or input, economies of scale, technological superiority, and government-created barriers.

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natural monopoly

answer

exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

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oligopoly

answer

(economics) a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors

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imperfect competition

answer

When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry

question

concentration ratios

answer

measure the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.

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Herfindahl - Hirschman Index,

answer

or HHI, is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure

question

3 conditions of monopolistic competition

answer

a large number of competing firms, differentiated products, and free entry into and exit from the industry in the long run.

question

production function shows

answer

The relationship between inputs and output

question

net-gain

answer

MR-MC

question

price-taking firms ultimate output rule

answer

says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

question

whenever a firm is a price-taker, its marginal revenue curve is a

answer

horizontal line at the market price: it can sell as much as it likes at the market price

question

TR > TC

answer

firm is profitable

question

TR = TC

answer

firm breaks even

question

TR < TC,

answer

firm incurs loss

question

profit/Q=

answer

TR/Q-TC/Q

question

P > ATC

answer

firm is profitable

question

P=ATC

answer

firm breaks even

question

P<ATC

answer

firm incurs loss

question

in the short run a firm will maximize profit by producing the quantity of output at which

answer

MC=R

question

ATC=MC

answer

break even

question

Profit=

answer

TR − TC

question

Profit=

answer

P-ATC

question

if break even price is higher than market price..

answer

theres a loss and its measured by the rectangle shaded below it

question

break even price

answer

the market price at which it earns zero profits.

question

Whenever the market price exceeds the minimum average total cost

answer

producer is profitable

question

Whenever the market price equals the minimum average total cost,

answer

producer breaks even

question

Whenever the market price is less than the minimum average total cost,

answer

producer unprofitable

question

A firm will cease production in the short run if the market price falls below the ______ _____, which is equal to minimum average variable cost.

answer

shut down price

question

the short run individual supply curve shows

answer

how an individual firm's profit-maximizing level of output depends on the market price, taking fixed cost as given.

question

short run market equilibrium

answer

when the quantity supplied equals the quantity demanded, taking the number of producers as given.

question

MR=MC at

answer

monopolist's profit-maximizing quantity of output

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