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45 Cards in this Set

  • Front
  • Back
A Firm
an organization commbining land labor and capital to produce a product or a service, hopefully for profit if the organization is a private for profit company
Explicit Costs
"Out of POcket" expenses that MUST be paid

Ex: Wages, rent, taxes
Accounting Profits
= Total Revenue- Explicit Coasts
Implicit Costs
Expenses that are NOT out of pocket and are frequently not calculated by managers

Ex: opportunity cost of labor and the opportunity cost of capital
Opportunity Cost of Capital
Availab;e reutrn ont he next best project, economists consider this as a production cost
Opportunity Cost Of Labor
Possible earnings fromt eh next best job, economists consider this as a production cost
Economic Profit
= Total Revenue-Explicit-Implicit costs

Accounting Profits-Implicit Costs
The Goal of a firm is to
Max Profits
TIme period where at least one factor of production is fixed is
Short Run
The time period where no inputs in a production process are fixed is
Long Run
When Marginal Product of labor increases intially
1. Workers can specilize in certian tasks
2. Learning by doing may be relevant
MPl (Marginal Product of labor)
Change in Total Product(Q)/
Change in labor
The Law of Diminishing Marginal Productivity
When adding addititonal units of a variable input (i.e labor) holding all other inputs fixed (I.e capital) a point exists beyond which the additional output resulting form each additional input will decrease
In the Short Run
Total Fixed Costs
Don't change with output
In the Short Run
Total variable costs
do change with output
Total Costs
Average FIxed COst
Average Variable Costs
Average total costs
MArginal COst
Change in total cost due to an increase in output in the production process

MC= change in TC/ change in Q
In the long run, all cost are
becuase FC=0 in the LR
WHen the LRAC curve is decreasing as quantity is increaseing, the firm is experiencing
Economies of Scale- reasons- specialization or resources,
When the LRAC curve is increasing, the firm is experiencing
diseconomies of scale- reason: difficult to manage a very large scale operation
Production decisions ignore
Sunk costs- fixed costs incurred in the past
Produce as long as MR is
Greater than or equal to MC
If MC intersects MR at more than one output level,
we can compare profits at each output level where MR=MC to determine the profit-maximizinf quantity where profit=TR-TC
Firms will not produce in the short run id
Price is less than AVC
Firms will not produce in the long run if
they are earning negative economic profits
Assumptions or conditions of perfect competition
1. Many Buyers and sellers
2. Perfect information about prices and other factos
3. Undifferentiated products or homogeneous products
4. No barriers to entry or exit
IN the short run the profit maximizing quantity is
the quanitity where MR=MC
only for perfect competition
At the profit maximizing quantity a firm will produce in the short-run if
Price is greater than or equal to AVC
SOme firms say that they cannot afford to go out of business despite the fact that they are losing money
The reason is tprobably because the selling price is greater than average variable cost of firms that also have fixed cost. If P is greater then AVC then the firm shoudl produce a = quantity, at least in the SR
Economic Profit=
Profit Maximization= TR-TC
shutdown point
at a lower price the firm would not produce in the short run becuase price would be less than AVC
a perfectly competitive firm
is a
Price taker because they have no influence on price
Exit in the short run, (In this case P <ATC also)
produce in the short run, some firms exit in long run

Fewer firms means that industry supply curve shifts inward

Prices rise, market quantity falls, individual firms quantity rised
this is long run equilibrium in perfect competition with zero economic profit. No firm has an incetive to enter or exit the industryk
these profits attract new firms, entry shirts the supply cure to the reight resulting in loweer prices and greater quantities for the market. Each individual firm's quantity will however decrease
Means "one seller"= Opposite end of the market power spectrum when compared with perfect competition
one seller-
market demand is the monopolists demand
why is MR under the demand curve
to sell an sddition unit the monopolist must lower the price to all consumers to sell an extra unit of output
you are
You will
Get There