Econ Test 3

Front 1

Supply in a competitive environment

Back 1

where suppliers are price takers, is based on costs which in turn is based on productivity

Front 2

Connection between Cost and Supply

Back 2

is apparent when you view supply as the relationship between the minimum compensation necessary and the quantity supplied

Front 3

Derivation of a Firm's supply curve

Back 3

Based on the assumption the supplier is motivated by profit, is a price taker, and the technology they have access to is fixed

Front 4

Profit

Back 4

Profit in an economic sense is total revenue minus total cost where cost means the benefits of opportunities given up

Front 5

Production, costs, and supply in two time periods:

Back 5

Short-run where at least one input is fixed
Long-run where all inputs are variable

Long-run is planning period
Short-run is operation period

Front 6

Production Function

Back 6

shows what is technologically efficient-the maximum output that a firm can produce from any given combination of inputs either in the short-run or in the long-run

Front 7

Law of Diminishing Marginal Product

Back 7

In short-run.
Law states that at some point additional units of a variable input applied to a set of fixed inputs will lead to smaller and smaller added units of output

Front 8

Three Measures of Productivity

Back 8

Total Product - the output per period
Average Product of an Input - total product divided by the level of input use
Marginal Product of an Input - is the change in total product divided by the change in the level of the input use

Front 9

Average Product of Labor

Back 9

Output divided by labor input. The growth of q/L is often referred to in the media as "productivity growth."

Front 10

Marginal Product of an Input

Back 10

Measured by the slope of the total product curve. It typically increases until the law of diminishing marginal product sets in

Front 11

Cost Minimization with more that one variable input

Back 11

When more than one input is variable, cost minimization requires equality between the marginal product, price ratio: _RJ/P_RJ (MP_R1)/(P_R1) = (MP_R2)/(P_R2) ... = (MP_RJ)/(P_RJ).
For all j variable inputs

Front 12

Returns to Scale

Back 12

In the long-run, when all inputs are variable, production functions may exhibit constant, increasing, or decreasing returns to scale. The returns to scale are differentiated by the relationship between the percentage change in output, %q, and the percentage change in all inputs, %R. Using absolute values,
if %q = %R there is constant returns to scale.
if %q > %R there is increasing returns to scale.
If %q < %R there is decreasing returns to scale.

Front 13

Constant Returns

Back 13

Empirical studies show that constant returns to scale is common for a number of industries

Front 14

Costs

Back 14

Costs are the sum of products of input prices times the number of inputs used

Front 15

Economic Meaning of Costs

Back 15

By costs, economists mean opportunity costs or the value of alternatives given up as a consequence of decisions taken. Outside economics costs often mean accounting costs

Front 16

Economic Profit or Loss

Back 16

An economic profit or loss is the difference between total revenue and total cost where costs are interpreted to mean all opportunity costs, including both money and nonmoney costs. If a firm's total revenues are greater than its total costs, the firm earns an economic profit. If the firm's total revenues are equal to its total costs, the firm earns a zero economic profit. If the firm's revenue are less than its total costs, the firm incurs an economic loss, or fails to cover all its importunity costs. An accounting profit is the difference between total revenues and total costs when costs are defined according to accounting principals.

Front 17

Short-Run: Total Costs

Back 17

In the short-run total costs are the sum of fixed and variable costs. The distinction between the latter two is that fixed costs do not vary with output, but variable costs do.

Front 18

Total short-run costs

Back 18

May be expresssed as per unit costs:
average cost (TC/q)
average variable costs (VC/q)
Marginal Costs ( ΔTC/ Δq or ΔVC/ Δq)

Front 19

Cost curves shaped by

Back 19

with fixed input prices, the marginal cost curve is shaped entirely by the marginal product curve, and the average variable cost curve is shaped entirely by the average product curve

Front 20

Minimum Marginal Cost

Back 20

Minimum marginal cost occurs at the point diminishing marginal returns sets in.

Front 21

Minimum Average Variable Cost

Back 21

Occurs at the output level where average product is maximized

Front 22

Minimum Average Cost

Back 22

occurs at a level of output higher than where average variable cost is minimized because average cost is the sum of average variable cost and average fixed cost and the latter falls continuously

Front 23

Long-run concepts

Back 23

are fewer in number than short-run cost concepts since there are no fixed costs to consider thus we have only long-run total cost, long-run average cost, and long-run marginal costs

Front 24

Economies and Diseconomies of Scale

Back 24

In the long-run , all costs are variable. As output grows and total cost increases, there are three possibilities:
(A) If cost rises more slowly than output, long-run average costs fall, and there are economies of scale.
(B) If cost rises at the same rate as output, long-run average costs are constant
(C) If cost rises more rapidly than output, long-run average costs increase, and there are diseconomies of scale

Front 25

Long-run technology

Back 25

Declining long-run per-unit costs reflect more effective technological choices due perhaps to the economics of mass production

Front 26

Principal/Agent problem

Back 26

Increasing long-run average costs arise primarily from the Principal/Agent problem or problems that managements of large firms face in trying to communicate

Front 27

Cost Curve Changes

Back 27

Cost curves will shift down due to technological advance or decreases in input prices. If input prices rise, costs will increase and cost curves will shift up. The change in cost due to a change in input prices must, in the long-run, take into account the possibility of input substitution

Front 28

Single Seller's Short-Run supply curve

Back 28

The single seller's short-run supply curve is its marginal cost curve above its average variable cost. If price falls below the minimum average variable cost. In the long-run, the single seller's supply curve is its marginal cost curve above its average cost curve.

Front 29

Without input price affected by market output

Back 29

If input prices are not affected by changes in market output, we can derive a short-run market supply curve by horizontally summing individual firms' short-run supply curve

Front 30

Price Elasticity of Supply

Back 30

Price elasticity of supply is the percentage change in quantity supplied due to a percentage change in price. Time is an important determinant of the price elasticity of supply

Front 31

Producers' Surplus

Back 31

Producers acquire a benefit whenever their revenues more than cover their opportunity costs. That benefit is called producers' surplus. The surplus can be represented graphically by the area above the supply curve and below the price line, or for an individual producer, by the area above the producer's marginal cost curve and below the price line