Microeconomics Test 3

Front 1

Explicit Costs

Back 1

Opportunity Cost of resources employed by a firm that takes the form of cash payments. These include wages, rent, interest, insurance, tax and the like.

Front 2

Implicit Costs

Back 2

A firm's Opportunity Cost of using its own resources or those provided by its owners without a corresponding cash payment. Examples include use of company owned buildings, company funds, and time of the owners. Implicit costs require no cash payments and no entry into the firm's accounting statement which records revenues explicit costs and accounting profit.

Front 3

Fixed Cost

Back 3

Costs independent of output. These remain constant throughout the relative range and are usually considered sunk for the relevant range ( not relevant to output decisions). Examples include rent, buildings, machinery, etc.

Front 4

Variable Costs

Back 4

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities, materials used in production, etc. Costs that change as the rate of output changes.

Front 5

Accounting Profit

Back 5

A firm's total revenue minus its explicit costs.
Accountants use this profit to determine a firm’s taxable income. It ignores personal resources used in the firm.or Implicit Costs.

Front 6

Economic Profit

Back 6

A firm’s total revenue minus its explicit and implicit costs. Economic Profit takes into account the opportunity cost of all resources used in production. This means paying oneself an amount of money will lower accounting profit but leave economic profit unchanged.

Front 7

Normal Profit

Back 7

The Accounting Profit Earned when all resources earn their opportunity cost; equal to implicit cost. Any Profit Exceeding Normal Profit is economic profit.

Front 8

Fixed Resources

Back 8

Any Resource that cannot be varied in the short run. In the Short run at least one resource is fixed. In the Long Run there are no fixed resources. Size of the Building is an example in the short run.

Front 9

Variable Resources

Back 9

Any resource that can be varied in the short run to increase or decrease production. In the Long Run all Resources can be varied.

Front 10

Total Product

Back 10

A firm’s total output.

Front 11

Marginal Product

Back 11

The change in total product that occurs when the use of a particular resource increases by one unit, all other resources constant.

Front 12

Total Cost

Back 12

Total Cost = Fixed Costs + Variable Costs
The sum of fixed costs and variable costs.

Front 13

Marginal Cost

Back 13

Marginal Cost = Delta Total Costs/ Delta output
If q tons moved per day = 2 Total Costs = 300 and Output is 200; 300-200= 100; 100/2
The Change in total cost resulting from a one-unit change in output; the change in total cost divided by the change in output. TC- Output = Result/tons moved per day

Marginal Cost = change in Total Cost divided by change in quantity.

Front 14

Marginal Physical Product (MPP)

Back 14

change in Total Physical Product(TPP) / Change in L

Front 15

LRAC

Back 15

The Long Run Average Cost, LRAC, curve of a firm shows the minimum or lowest average total cost at which a firm can produce any given level of output in the long run (when all inputs are variable).

Front 16

Economies of Scale

Back 16

Economies of Scale: Forces that Reduce a firm’s average cost as the scale of operation increases in the long run.

Front 17

Diseconomies of Scale

Back 17

Forces that may eventually increase a firm’s average cost as the scale of operation increases in the long run.

Front 18

Identify the four criteria used to describe market structure

Back 18

Market Structure Criteria: Important features of a market such as,(1) the number of firms, (2) product uniformity across firms, (3) firm’s ease of entry and exit, and (4) forms of competition.

Front 19

Perfect Competition Market Structure Characteristics

Back 19

(1) Many Buyers and sellers so many that each buys or sells only a fraction of the total amount in the market; (2) Firms sell a commodity, which is a standardized product, such as a bushel of wheat, a gallon of milk, a dozen eggs, an ounce of gold, or a share of google stocks; such a product does not differ across suppliers; (3) Buyers are Fully Informed about the price and availability of all resources and products; (4) firms and resources are freely mobile-- that is overtime they can easily enter or leave the industry without facing obstacles like patents, licenses, and high capital costs. if these conditions exist in a market an individual buyer or seller has no control over the price and price is determined by market supply and demand. Examples include wheat, corn, cotton, and livestock.

Front 20

Perfectly Competitive firm Demand Curve

Back 20

The Demand Curve faced by the perfectly competitive firm is a horizontal straight line. Market Equilibrium Supply Curve and Demand Curve Intersect Perpendicularly forming an X at a fixed cost. the Intersect is the part in which they meet in the center.

Front 21

Explain why equating marginal cost with marginal revenue maximizes profits for the perfectly competitive firm

Back 21

Equating Marginal cost with marginal revenue maximizes profits for the perfectly competitive firm because the extra revenue generated from production, with marginal cost, the extra cost of production. If these two marginals are not equal, then profit can be increased by producing more or less output.

Front 22

Describe the conditions under which a perfectly competitive firm should shut down production rather than continue to operate at a loss.

Back 22

If average variable cost exceeds the price at all rates of output the firm should shut down production rather than continue to operate at a loss.

Front 23

Explain why perfectly competitive firms will operate at their break-even point in the long run

Back 23

Perfectly Competitive firms will operate at their break-even point in the long run because firms are not motivated to leave a market unless they would be operating at a loss.Additionally they are profiting in the short run.

Front 24

Productive Efficiency (Making Stuff Right)

Back 24

The condition that exists when production uses the least-cost combination of inputs; minimum average cost in the long run

Front 25

Allocative Efficiency (Making The Right Stuff):

Back 25

The Condition that exists when the firms produce the output most preferred by consumers; marginal benefit equals marginal cost.

Front 26

Explain why Perfect competition guarantees Productive and Allocative efficiency

Back 26

Because conditions of Perfect Competition require that Marginal Benefit equal the marginal cost it is allocatively efficient and because firms under said conditions are required to meet the minimum long run average cost or leave the market to avoid continued losses perfect competition produces output at minimum average cost in the long run.

Front 27

Producer Surplus

Back 27

A bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost. Total revenue minus variable costs of production.