Econ Test Ch 7-13

Front 1

production

Back 1

process by which inputs are combined, transformed, and turned into outputs

Front 2

firms are the demanders in __markets and and suppliers in __markets

Back 2

input, output

Front 3

firm

Back 3

organization existing to produce a good or service to meet a percieved demand

Front 4

perfect competition (4)

Back 4

an industry in which there are:

small firms
producing identical products
no price control: price takers
freely exit/enter market

Front 5

homogeneous products

Back 5

undifferentiated products. identical

Front 6

supply, demand curves for the market and individual firm

Back 6

cross lines vs straight line

Front 7

primary objective of firms

Back 7

profit maximization

Front 8

firm decisions

Back 8

1. how much output to supply
2. how to produce that output
3. how much of each input to demand

Front 9

profit (economic profit)

Back 9

difference between total revenue and total cost

Front 10

total revenue

Back 10

amount recieved from the sale of the product (Q x P)

Front 11

total cost

total economic cost

Back 11

total explicit costs

total explicit costs plus implicit costs

out of pocket costs
normal rate of return costs
opportunity costs

Front 12

normal rate of return

Back 12

rate of return on capital that is sufficent to keep owners and invenstors satisfied.

Front 13

implication of normal rate of return

Back 13

firms in a perfectly competitive industry will earn zero economic profit

Front 14

short run

Back 14

period where

fixed factor of production
firms can neither exit or enter industry

Front 15

long run

Back 15

no fixed factors of production

increase/decrease production
firms can enter/exit industry

Front 16

the bases of firm production techniques

Back 16

1. market price of output
2. the techniques of production that are available
3. the price of outputs

Front 17

production technology

Back 17

quantitative relationship between inputs and outputs

Front 18

labor intensive technology

Back 18

technology that relies heavily on human labor

Front 19

capital intensive technology

Back 19

technology that relies heavily on capital instead of human labor

Front 20

choice of technology

Back 20

one that minimizes costs

Front 21

production function or total production function

Back 21

a numerical or mathematical expression of a relationship between inputs and outputs. it shows units of total products as a function of units of inputs.

***
The production function inherently represents the mathematical relationship between the levels of inputs (capital, labor) and the output (Q). It thus suggests that quantity production can be considered a function of the levels of inputs used.

Front 22

marginal product

Back 22

the additional output that can be produced by adding one more unit of a specific input

Front 23

law of diminishing returns

Back 23

when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines

Front 24

average product

Back 24

the average amount produced by each unit of a variable factor of production

Front 25

average product of labor equation

Back 25

total product/total units of labor

Front 26

marginal product

Back 26

additional output produced by hiring one more unit of a specific input

Front 27

average product

Back 27

average amount produced by each units of a variable factor of production

Front 28

production technology

INPUTS:
complements
substitutes

Back 28

bakers and ovens

weavers and looms

Front 29

fixed costs

aka

Back 29

any cost that does not depend on the firms level of output. these costs are incurred even if the firm is producing nothing. there are no fixed costs in the long run

overhead

Front 30

marginal product of labor equation

Back 30

change quanitity/change labor

Front 31

average product of labor

Back 31

Q/L

Front 32

variable costs

Back 32

costs that depend on the level of output chosen

Front 33

total costs

Back 33

TFC + TVC

Front 34

average fixed costs equation

Back 34

TFC/Q

Front 35

sunk costs

Back 35

another name used for fixed costs in the short run becuase firms have no choice but to pay them

Front 36

TVC

Back 36

sum of price of different units of labor

Front 37

spreading overhead

Back 37

dividing total fixed costs by units products. this number decreases

Front 38

total varaible costs

Back 38

costs that vary with output in the short run

Front 39

marginal costs

Back 39

increase in total cost that results from producing one more unit of output.

Front 40

Delta TVC= ?

Back 40

MC

***
Marginal cost represents the change in cost as a result of producing one additional unit of a good. Since Fixed Costs stay the same across all quantities produced, the only change in costs would have to be resulting from increases in variable costs. Thus, to measure the change in cost (MC), one need to measure the change in TVC from a particular quantity to one unit more of that quantity. (Remember, delta equals change).

Front 41

relationship between AVC and MC

Back 41

when MC<AVC, AVC falls
when MC>AVC, AVC rises
when MC=AVC, AVC is at a min

Front 42

total cost

average total cost

Back 42

TC= TFC + TVC

ATC=AFC+AVC

Front 43

ATC and MC relationship

Back 43

when MC<ATC, ATC falls
when MC>ATC, ATC rises
when MC=ATC, ATC is at a minimum

Front 44

total revenue

Back 44

the total amount a firm takes in from the sale of the product

price x quantity

Front 45

marginal revenue

Back 45

additional revenue that a firm takes in when it increases output by one additional unit

Front 46

when will a firm stop producing

what happens when MR>MC

Back 46

when MR=MC

firm will expand production

Front 47

the marginal cost curve of a competitive firm is the firms

Back 47

short run supply curve

Front 48

rate that is just sufficient to keep current investors in the industry

Back 48

normal rate of return

Front 49

breaking even

Back 49

situation where firm is earnign exactly a normal rate of return

Front 50

operating profit/loss or operating revenue

Back 50

total revenue minues total variable costs

Front 51

shut down point

Back 51

lowest point of AVC curve.

***
If P<AVC, a firm will be incurring an operating loss; in other words, the firm cannot even cover their variable costs in the short-run. Thus, they'd be better off shutting down immediately in the short-run in that situation (P<AVC).

Front 52

short run industry supply cuve

Back 52

sum of all marginal costs curve (above AVC)

Front 53

what is a firms short run supply curve?

Back 53

marginal cost curve above AVC curve

Front 54

what to do when

TR>TC
TR>=TVC
TR<TVC

Back 54

operate/expand
operate/contract (exit)
shut down/contract (exit)

Front 55

increasing returns to scale or economies of scale

Back 55

increase in a firms scale of production leads to lower costs per unit produced

Front 56

constant returns to scale

Back 56

increase in firms scale of production has not effect on costs per unit produced

Front 57

decreasing returns of scale/ diseconomies of scale

Back 57

increase in firms scale of prudction leads to higher costs per unit produced

Front 58

long run average cost curve

Back 58

a graph that shows the different scales on which a firm can choose to operate in the long run

Front 59

constant returns

Back 59

relationship between amount of outpuit and input stay constant

(double output=double input)

Front 60

optimal scale of plant

Back 60

scale of plant that minimizes average cost

***
Optimal scale of the plant regards the idea that, in the long-run, firms must choose the labor and capital combinations that minimize long-run average costs. Thus, suppose we have two firms that, in the long-run, select two different combinations of inputs. Firm A selects a combination that has a LRAC = $9. Firm B selects a different combination that has a LRAC = $8. Since Firm B is producing more cheaply, they can afford to offer the product at a lower cost (P*=$8) in the market; this is a huge problem for Firm A, since they can't set price at that level or they'll lose money (and eventually exit). Thus, it is imperative that firms operate at the point of lowest LRAC as a means of not being undercut by their competitors. The selection of that point -- the combination of capital and labor inputs that get us there -- is considered the optimal scale of the plant.

Front 61

long run competitive equilibrium

Back 61

when p=srmc=srac=larc and profits are zero

Front 62

input markets

demander
suppliers

Back 62

firms
households

Front 63

derived demand

Back 63

firms only enter when there is a demand for their output

Front 64

productivity

Back 64

productivity of an input is the amount of output produced per unit of the input

Front 65

marginal revenue product

Back 65

additional revenue generated by employing one more unit of an input

Front 66

firms will hire more input as long as...

Back 66

MRP l > MC l

Front 67

in a perfectly competitive market...

MC l and wage

Back 67

MC l= wage

Front 68

is their such thing as a singular labor market

Back 68

no

Front 69

balkanization of the labor market

Back 69

regional and occupational barriers that give impression of seperate labor markets

Front 70

what happens to...

product price
marginal revenue product
firms hiring workers

when demand increases/decreases

Back 70

rise/fall
increase/decrease
hire more/less

Front 71

firm will rent land when it is profitable to do so

Back 71

MRPa>Pa

***
This condition denotes that the additional revenue to renting a unit of land exceeds the price of renting that unit of land.

Front 72

capital goods

types of capital

Back 72

those goods used as input to produce other hoods and services

phyiscal- equip. factories, etc
social- infrastrcture
intangible: human capital

Front 73

investment

measures as a __

Back 73

new capital additions to a firms capital stock

flow, or change, over time

Front 74

depreciation

Back 74

the decline of an assets economic value over time

Front 75

captial markets

demanders
supplier

Back 75

firms
households

Front 76

interest

Back 76

income recieved by households in order for them to supply (deposit/invest) their money

Front 77

expected rate of return

Back 77

annual rate of return a firm expects to obtain through a capital investment

Front 78

opportunity costs of investment

Back 78

even by default, firm could invest money and expect to recieve the going interest rate in return

Front 79

how is the price of land set

Back 79

pureley on demand

Front 80

partial equilibrium analysis

Back 80

examining the equilibrium conditions with an individual market for households and firms seperatley

Front 81

general equilibrium

Back 81

condition that exists when all markets in a economy are in simultaneous equilibrium

Front 82

efficiency

Back 82

condition in whcih economy is producing twhat people want at least possible cost

Front 83

pareto efficiency

Back 83

occurs when the reallocation of resoucres leaves some people better off without making any other individual worse off

Front 84

pareto optimality

Back 84

the point of the economy where resources cannot be reallocated in such a neabs to conform to pareto efficiency

Front 85

firms will operate at the point of least cost on which line

Back 85

LRAC

Front 86

people will buy goods and services that generate utility greate than __ __

Back 86

market price

Ugood>Umoney

Front 87

profit maximization occurs when

Back 87

P=MC

Front 88

market failure

4 causes

Back 88

occurs when resources are missallocated, or allocated inefficently

imperfect market structure
public goods
external costs/benefits
imperfect information

Front 89

imperfect competition

ex

Back 89

industry where firms have some control over price and competition

utilities

Front 90

public goods

ex

Back 90

goods or services that bestow collective beneifts on memebers of society

private industry will not produce all goods people want

national defense

Front 91

private goods

Back 91

products produced by firms for sale to individual households

Front 92

externalities

ex

Back 92

social cost or beneift result from some activity or transaction that is imposed on parties outside the activity or transaction

pollutio

Front 93

tort law

Back 93

those who impose externalities are held accountable to them

body of rules that deals with third party effects

Front 94

imperfect information

Back 94

absence of full knowledge concerning product characteristics, available prices, and so forth

Front 95

imperfectly competitive industry

Back 95

an industry in which single firms have some control over the price of their output

Front 96

market power

Back 96

imperfectly competitive firms ability to raise price without losing all of the quanity demanded for its product

Front 97

monopoly

Back 97

industry consisting of a single firm

Front 98

pure monopoly

(3)

Back 98

industry with a single firm that produces a product for which there are no close subs and which there are sig barriers of entry.

Front 99

barrier to entry

Back 99

something that prevents new firms from entering and competing in imperfectly competitive industries

Front 100

government franchise

Back 100

a monoploy by viter of government directive (utilities)

Front 101

patent

Back 101

barrier of entry that grants exclusive use of the patented product or process to the inventor

Front 102

economies of scale and barriers to entry

Back 102

large capital investments requirements are often a barrier to entry

Front 103

ownership of a scarce factor of production

Back 103

owning something that doesnt exist anywhere else (diamon mines)

Front 104

4th quanity of production a imperfectly competitive firm deals with

Back 104

what price to charge

Front 105

price discrimination

Back 105

selling to differnt consumers or groups at different prices

Front 106

for a monopolist, increase in output involed not just producing more and selling it, but __the price

Back 106

reducing

Front 107

collusion

Back 107

the act of working with other producers in an effort to limit competition and increase joint profits

Front 108

rent seeking behavior

Back 108

actions taking by households or firms to preserve positive profits

Front 109

government failure

Back 109

situation where government becomes the cause of rent seeking behavior

Front 110

public choice theory

Back 110

an economic theor that public officials who set economic policies and regulate the players act in their own self interest, just as firms do

Front 111

price discrimination

perfect price discrimination

Back 111

charging differnt prices to differnt buyers

occurs when a firm charges the maximum amount that buyers are willing to pay for each unit

Front 112

TC=

Back 112

TFC + TVC

Front 113

profit equation

Back 113

TR - TC

Front 114

where is the short run supply curve for a short run compeitive industry graph

Back 114

the MC line above the AVC intersection point

Front 115

operating loss vs operating profit

Back 115

whether or not a firm is still losing money from simply operating

Front 116

production function

Back 116

Q=f(K,L)

Front 117

TC=
AFC=
AVC=
ATC=

Back 117

TFC+TVC
TFC/Q
TVC/Q
TC/Q