Agec 619

Front 1

In the Firm's Behavior, What is the main OBJECTIVE?

Back 1

*To maximize profit subject to the production technology and capabilities of a firm.

*To Maximize Profit based on a certain amount of output.

Front 2

How do you calculate PROFIT?

Back 2

Profit = Total Revenue - Total Costs

Front 3

What does r mean?

Back 3

It is the per unit cost of producing output.

Front 4

What is Total Cost?

Back 4

It is the sum of all fixed and variable (Q) costs,

an efficiency relationship that shows the lowest possible total cost the firm would incur to produce a level of output, given the firm's technological capabilities and the prices of factors of production.

Front 5

What is Fixed Cost?

Back 5

Cost Incurred even if output is 0.

Front 6

What are some examples of Fixed Costs?

Back 6

Building, Land, Machinery, Rent.

Front 7

What is another name for Fixed Costs?

Back 7

Sunk Costs

Front 8

Whare is Variable Cost?

Back 8

Are costs that vary with output produced and can be avoided by ceasing production.

Front 9

What is Average Total Costs?

Back 9

It is the ratio of the sum of Fixed Costs and Variable Costs to Quantities produced.

Front 10

What is the formula for ATC?

Back 10

ATC= (FC+VC)/Q

Front 11

What is Average Variable Cost?

Back 11

Is the ratio of variable costs to quantities produced

Front 12

What is the formula for AVC?

Back 12

AVC=(VC)/Q

Front 13

What is the formula for AFC?

Back 13

AFC=(FC)/Q

Front 14

What is Economies of Scale?

Back 14

Fall in average costs as outputs increase

Front 15

What is Constant Returns to Scale?

Back 15

Average costs do not vary with output.

Front 16

What is Diseconomies of Scale?

Back 16

Average costs rises as output increases.

Front 17

What are some reasons for Economies of Scale?

Back 17

*Average costs decline as fixed cost are spread over larger output.
*Specialized training: Learning Curve Effects.

Front 18

What is Marginal Cost?

Back 18

Is an increment in total costs from producing one more unit of output. It is Upwar Sloping: Output of fimr increases with increase in price.

Front 19

What is the Formula for MC?

Back 19

MC= dTC / dQ
And AC=MC

Front 20

The distinction between Fixed cost and Variable cost also depends on what?

Back 20

On teh time period allowed for adjustment.

Front 21

What happens in the Long Run?

Back 21

Producers can adjust fixed costs. "In the Long Run all costs are variable" ANd a firm produces at its minimum average cost.

Front 22

What are the two types of profits?

Back 22

Economic Profit and Accounting Profit.

Front 23

What is Accounting Profit?

Back 23

Sales Revenue - Accounting Costs. (eg. Income Statement)

Front 24

What is Economic Cost?

Back 24

The opportunity costs is the value of best foregone alternative use of those resources.

Front 25

What is Economic Profit?

Back 25

Accounting Profit - Economic Cost

Front 26

What are some properties of Cost Functions?

Back 26

*Cost curves are dependent on amount produced holding factor prices constant. (Increases in factor prices can shift cost curves up)
*One can infer the cost curve from the production function (input-output) (Knowing a firm's cost is the same as knowing its technologies).

Front 27

What is Demand?

Back 27

Various quantities of a particula commodity that consumers are willing and able to buy as the price of that comodity varies, with all other factors that affect demand held constant at a given time period.

Front 28

What is the Law of Demand?

Back 28

Price and Quantity is inversely related.

Front 29

What is Own-Price elasticity?

Back 29

Responsiveness of quantity demanded to a change in price with other factors held constant.

Front 30

What is the formula for Own-Price elasticity?

Back 30

n= dQ/dP * P/Q

Front 31

What is the impact of a given change in price on total revenue?

Back 31

*If demand is elastic, price and total revenue vary inversely.
*If demand is inelastic, price and total revenue vary directly.

Front 32

What are some factors impacting Demand Inelasticity?

Back 32

*Few Substitutes
-Implying a differentiated product
*Buyer Expenditures are not a large fraction of total expenditures.
-Eg. Gas, DVD's premium coffee, Krispy Kreme Donuts.

Front 33

What is the difference between Brand vs. Industry level Elasticities?

Back 33

Brand level tends to be larger than industry level elasticity.
-Consumers can switch across brands with in an industry while industry products tend to have fewer substitutes.

Front 34

What is Total Revenue?

Back 34

Indicates how the firm's sales revenues vary as a function of how much product it sells.

Front 35

What is Marginal Revenue?

Back 35

It is the rate of change in TR from the sale of an additional unit of output.

Front 36

What is the formula for TR?

Back 36

TR = P*Q

Front 37

What is the formula for MR?

Back 37

MR = dTR/dQ

Front 38

What happens with MR for Elastic Demand (n>1)?

Back 38

MR>0
Increase in output from a reduction in price will raise TR.

Front 39

What happens with MR for inelastic Demand (n<1)?

Back 39

MR<0
Increase in output from a reduction in price will lower TR.

Front 40

What should we assum when interpreting MR?

Back 40

That a firm faces a downward sloping demand.

Front 41

What is the Firm Optimizing Behavior?

Back 41

Choice of output determined by MR=MC
-Produce the quantity amount when the additional revenue earned from producing one increment of output just equals its additional costs.

Front 42

What is the formula to calculate the Learner Index?

Back 42

(P-MC)/P = 1/-n

Front 43

What is the relationship of the Learner Index with the Elasticity of Demand?

Back 43

They are inversely related.

Front 44

In the Firm Optimizing Behavior SR/LR, what happens when the choice of output determined AT Prices > AVC(SR) or ATC(LR)?

Back 44

MR=MC
-Produce the quantity amount when the additional revenue earned from producing one increment of output jsut equals its additional costs.

Front 45

In the Firm Optimizing Behavior SR/LR, what happens when the choice of output determined AT Prices < AVC(SR) or ATC(LR)?

Back 45

Firms shut down: No output produced. (Shut down price).

Front 46

What happens on a Price Taking Firm (Perfectly competitive firm)?

Back 46

MR=P=MC

Front 47

What are Horizontal Boundries of the firm?

Back 47

Deal with quantities (Scale) and varieties (Scope) of products and services that are produced by a firm (Within a given industry).

Front 48

What is Scale?

Back 48

Quantities

Front 49

What is Scope?

Back 49

Varieties

Front 50

What is Economies of Scale?

Back 50

Declining average cost with volume.
*Bigger is better (up to a certain size).

Front 51

What is Economies of Scope?

Back 51

Cost savings achieved when different goods/services are produced "under one roof"

Front 52

What are some indicators of Economies of Scale?

Back 52

*When a marginal cost is less than average cost, there are economies of scale
*Fixed costs are spread over a large volume of output.

Front 53

What is the Minimum Efficient Scale?

Back 53

The point up to where the firm is willing to produce.

Front 54

What is Diseconomies of Scale?

Back 54

Average cost eventually start increasing as capacity constraints are met or exceeded. (Limits to the size of the growth).

Front 55

What is the difference between Economies of Scale and Economies of Scope?

Back 55

*Economies of scope refers to the costs savings from increasing the VARIETY of goods produced within a firm.
*Economies of scale refers to the costs savings from increasing the QUANTITY of goods produced within a firm.

Front 56

What are some common expressions that describe strategies that exploit the economies of scope?

Back 56

*Leveraging core competencies
*Diversification into related Products
*Complementary assets or synergies

Front 57

What are some Sources of Economies of Scale/Scope?

Back 57

*Indivisibilities and the spreading of Fixed costs
*Specialization
*Purchasing
*Advertising
*R&D

Front 58

What are Indivisible (Lumpy) resources?

Back 58

A minimum amount of input is required in the production process that cannot be scaled down. And indivisible resource is a Fixed Cost

Front 59

What is the relationship between indivisibilities and AC?

Back 59

Indivisible resources are capital intensive, are a higher fixed cost component, it impacts the curvature of AC, it is a tradeoff between Flexibility and low cost.

Front 60

What are some SR adn LR Strategies?

Back 60

*Cost reduction through better capacity (SR Economies of Scale)
*Cost reduction by switching to high fixed cost technology (LR Economies of Scale)

Front 61

What are Economies of Scale and Boundries?

Back 61

*Larger markets lead to specialized firms
*As markets get even larger, the specialized activity may become "in house" duet to economies of scale

Front 62

What are some Economies of scale in purchasing?

Back 62

*Large buyers can get volume discounts

Front 63

What are some Economies of Scale in R&D?

Back 63

*High Fixed costs: Minimum feasible size (indivisible) for R&D projects and R&D departments.
*Economies of scope in R&D; ideas from one project can help another project.

Front 64

What is Strategic Fit?

Back 64

is defined as complementary resources that yield economies of scope and it renders piece-meal copying of corporate strategy by rivals unproductive, it is also essential for long term competitive advantage.

Front 65

What are the sources of Diseconomies of scale?

Back 65

*Increasing Labor costs (Labor unionization)
*Bureaucracy effect (Slack workers)
*Scarcity of specialized resources (management labor)

Front 66

What is the Learning Curve Strategy?

Back 66

Expand output rapidly to benefit from the learning curve and achieve a cost advantage.

May lead to losses in the short run term, but ensure long term profitability.

Front 67

What is the definition for the Vertical Boundaries of the firm?

Back 67

The activities that the firm performs itself as opposed to purchases from independent firms in the market.

Front 68

What does it mean by "Choice between the 'invisible hand' of the market and the 'visible hand' of the organization?

Back 68

It means if you should MAKE OR BUY

Front 69

What are some determinants of Making vs. Buying?

Back 69

Decision depends on the costs and benefits of using the market as opposed to performing the task in-house

Outside specialists may perform a task better than the firm can

Intermediate solutions are possible.

Front 70

What are the benefits of Using the Market?

Back 70

*Market firms may hold low cost production technology
*Market firms can achieve economies of scale htat in-house units cannot
*Market firms are subject to market discipline, whereas in-house units may be able to hide their inefficiencies behind overall corporate success.

Front 71

What are Agency Costs?

Back 71

*Agency costs arise when managers and workers knowingly do not act in the best interest of their firm
*The incentives to be efficient and innovative are weaker when a task is performed in-house
*Agency Costs are particularly if the task is performed by a "cost center" within an organization.
*It is difficult to internally replicate the incentives faced by market firms.