Econ Exam 2 (Chapter 7)

  1. Goal of all firms
    To maximize profits
  2. Profit Function
    • Profit = Total Revenue - Total costs
    • Used by accountants and economists
  3. Accounting costs
    • Explicit only
    • Physical money changes
  4. Economic Costs
    • Count on Explicit and implicit
    • Implicit is like opportunity costs
  5. Normal profit
    • Zero economic profit
    • The accounting profit equals the opportunity cost
  6. Variable resources
    • Can be a varied quickly
    • In the long run any thing can be varied
  7. Fixed resources
    • Not easily changed like the size of a building
    • A lot of things can be fixed in the short run but in the long run nothing is fixed
  8. Production function
    • The relationship between the amounts of resources employed and total product
    • Between inputs and outputs
  9. Marginal Product
    the change in total product resulting from an additional unit of labor
  10. Law of diminishing marginal returns
    • The more variable resources you add given a amount of other resources marginal product will eventually begin to decline
    • In the short run every firm will face this
    • Determines the shape of the shortrun marginal cost curve
    • -It falls until the declining marginal product kicks in
  11. Increasing Marginal returns
    With each additional unit product increases
  12. Three basic decision all firms must make
    • How much output to supply
    • Which production technology to use
    • How much of each input to demand
    • -Last two dependent on which ways the cheapest
  13. Firms decisions are BASED on what three things
    • The market price of output
    • The techniques of production that are available
    • The prices of inputs
  14. Fixed costs
    • Incurred in the short run even when no output is produced
    • Does no vary with output
    • Sunk costs
    • i.e. rent
  15. Variable cost
    • Cost of variable resources, depends on level of product chosen (Q)
    • When there are no variable resources the cost is zero
    • More output = more variable costs
    • Most costs are variable costs
    • Influence firms decisions
  16. Marginal Cost
    • Change in total cost / change in quantitiy
    • Increasing marginal returns = decrease of marginal cost
    • The slope of the total cost curve
    • Always intersects the average total cost curve and marginal cost curve at their lowest points
  17. Economies of scale
    • Forces that reduce a firms average cost as the scale of operation increases
    • Long run average cost falls as output expands
    • Ex. large scale machine would make the cost of a product more than a basic machine if the demand wasn't high
    • An increase in a firm's scale of production leads to lower costs per unit produced
  18. Diseconomies of scale
    • Forces that may eventually increase a firms average cost as the scale of operation increases in the long run
    • Long run average cost curve increases ats output expands
    • The larger a company get the more labor they need in the form of management and monitoring and communication can get mangeled
    • An increase in a firm's scale of production leads to higher costs per unit produced
  19. Minimum efficient scale
    • The lowest rate of output at which long run average cost is at a minimum
    • Lowest point on LRAC, optimum plant size, production occurs at the lowest possible cost
  20. Short run
    • The firm is operating under a fixed scale
    • Firms can neither enter nor exit an industry
  21. Long run
    • Firms can increase or decrease the scale of operation
    • New firms can enter and exit the industry
  22. Spreading overhead
    • The process of dividing total fixed cost by more units of output
    • Average fixed cost declines as quantity rises
  23. Long Run Average Cost Curve
    • A curve that indicates the lowest average cost of production at each rate of output when the size or scale of the firm is allowed to vary
    • Answers the question: Given the level of output what is the lowest long run cost at which I can produce
    • Formed from short run ATC
  24. What does the Average Variable cost tell us
    • Gives us the "shut down point" 
    • If P<AVC the firm should shut down in the short run
  25. What does the Average Total Cost tell us
    • Information about the level of profits (or losses) a firm will receive for a given amount of output
    • In the long run ATC = AVC
    • A firm will need profits to be greater than or equal to zero to stay in business in the long run
  26. What does Marginal Cost tell us
    • Gives us the profit maximizing level of output. Firms will want to produce where MR = MC in order to maximize profit
    • Gives us an idea about the economic efficiency of a certain level of output
    • Most important curve
Card Set
Econ Exam 2 (Chapter 7)