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30 Cards in this Set
- Front
- Back
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what are the three decisions firms must make?
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1) how much output to produce or supply 2) how to produce that output 3) how much of each input to demand.
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A Profit-maximizing PC firm will supply output...
The MC curve of such a firm is thus... |
up to the point that price (marginal revenue) equals marginal cost. (P=MR) = MC
its supply curve |
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Why are output 9supply) decisions in the long run less constrained htan in the short run?
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1) the firm can increase any or all of its inputs and thus has no fixed factor of production
2) firms are free to enter industries to seek profits and to leave industries to avoid losses. |
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A fixed factor of produciton eventually causes...
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MC to increase along with output. In the long run all factors can be varied. For example in the sandwich shop, if we add more grills, it is no longer inevitable that increased volume comes with higher costs.
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define a normal rate of return
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Normal ROR is a rate that is just sufficient to keep current investors interested in the industry.
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What does total cost include?
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a normal ROR.
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Define Normal ROR.
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rate that is just suffcicient to keep current investors interested in the industry.
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When there are positive profits in an industry...
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new investors are likely to be attracted to the industry
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Define LOSS.
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Company is earning a rate of return that is below normal.
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Define Breaking Even.
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The situation in which a firm is earning eactly a normal rate of return.
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What are the three conditions that holds for a firm at any given moment?
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1) the firm is making positive profits 2) the firm is suffering losses, or 3) the firm is just breaking even.
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How would you graph a Firm Earning a Positive Profit in the Short Run (Figure 9.1)
How would you find TR? |
a) graph the industry supply and demand on a $ vs Q, the intersection is P*
b) graph the representative firm on a $ vs q with MC, ATC, AVC. Where P* = MC is q and where q hits ATC is Cost. TR is P* x q* |
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What does positive profits in the short run mean for firms?
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1) the firm has an incentive to operate in short-term and expand later.
2) New firms have incentive toenter & compete in market. |
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What categories do firms earning a loss fall into:
What can/cannot firms do in the short run? |
1) shutdown
2) continue to operate in short run to minimize their losses. In the short run, firms cannot exit the industry. THe firm can shut down, but it cannot get rid of its fixed costs by going out of business. |
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What is the sole factor determining if a firm shuts down?
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Total Revenue from operating is sufficient to cover total variable cost.
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Graphically describe a scenario in which a Firm is suffering losses but showing total revenue in excess of TVC in the short run.
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a) graph the industry on $ vs Q, intersection of S, D is P*.
b) graph a represenatitive firm on $ vs q, graph curves MC, ATC, AVC. Where P* = MC is q*. q* x MC = TR q* x AVC = VC q* x ATC = TC if TR > VC operate if shut down then loss would be q* x (ATC - AVC) |
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Graphically where is the shutdown point
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Graph MC, ATC, AVC on $ vs q
the point at which P* = MC = AVC is the shutdown point |
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What can cause the industry supply curve to shift?
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in the short run, the industry supply curve shifts if something -- a dcrease in the price of some input, for instance -- shifts that marginal cost curves of all the individual firms simultaneously.
In the long run, an increase or decrease in the number of firms -- and therefore in the number of individual suply curves shifts the total industry supply curve. |
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Describe the Profits, Losses, and PC firm Decisions in the Long and Short RUn
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1) Profits: TR > TC, P = MC: Operate, Expand: New firms enter
2) Losses: TR >= TVC, P = MC: operate (loss < TFC), Contract: firms exit 3) Losses: TR < TV, Shut down: loss = total fixed cost, Contract: Firms exit |
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When a firm that is suffering losses decides to shut down in the short run, it has an incentive to contract in the long run.
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Remember that the shor-run cost scurves show costs that are determined by the current scale of plant. In the long run, hoowever, firms have to choose among many potential scales of plant.
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Just as firms have to analyze ____ ____ to arrive at a cost structure in the short run, they must also compare their costs at _____ _____ of plant to arrive at long-run costs.
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different technologies
different scales |
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Why do short-run curves look like they do?
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b/c in the short run there is a fixed factor of production.
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What scale of production is there in the long run?
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There is no scale of production and no fixed factor of production in the long run.
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What determines the shape of the LRAC curve?
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Depends on how costs vary with scale of operations.
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Describe the internal economieS of scale.
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1) economies of scale: when an increase in a firm's scale of production leads to lower average costs.
2) when average costs do not change with the scale of production. 3) when an increase in a firm's scale of production leads to higher average costs. |
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What is the increasing returns to scale relationship?
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A given percentage of increase in inputs leads to a larger percentage of increaes in he production of output.
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What is the advantage of increasing returns to scale with fixed input prices?
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As output rises, the average cost of production falls.
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What have economics of scale come from?
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the advantages of LARGER FIRM SIZE rather than gains from plant size.
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Define LRAC
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Long-run Averag Cost Curve shows the different scales on which it can choose to operate in the long run.
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When the firm experiences economies of scale (EOS), what happens graphically?
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the LRAC declines with output. The LRAC curve shows the positions of the different sets of short-run curves among which the firm must choose.
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