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40 Cards in this Set
- Front
- Back
economic profit |
payment received in excess of what is necessary to get something done |
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fixed costs |
cost that neither increase nor decrease as output changes. |
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law of diminishing marginal return |
after some point, as a firm adds more and more units of an input, the unputs marginal physical product diminishes ( it adds less to total output than before) |
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marginal cost |
addition to total cost due to increasing output by one unit. |
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marginal physical product (MPP) |
addition to total output due to increasing an input ( such as labor) by one unit |
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the short-run |
a firm can change (either increasing or decresing some but not all of its inputs in order to produce more or less output.
hiring more labor buying more materials leaves plant and size alone |
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the long run |
when the firm can change all of its inputs, including its plant size and equipment |
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marginal cost |
the increase in total cost, by increasing its output by one unit. |
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marginal cost changes |
because marginal MPP changes |
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MPP is going up |
so MC goes down as output is expanded |
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decreasing marginal returns, MPP is going down |
so Marginal Cost goes up once decreasing return have set it |
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first output will have marginal high marginal cost |
however, the succesive units of output will take fewer units of labor to produce and thus marginal cost will fall |
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marginal cost are the most important cost in making output decisions |
marginal cost is the increase in total cost needed to produce another unit of output |
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the section of falling Marginal Cost reflects |
increasing Marginal Physical Product |
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the section rising Margical Cost |
reflects decreasing MPP |
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total cost consist of |
total fixed cost - the cost of inputs the firm cannot change in the short run (plant equip)
total variable cost- the total cost of all the inputs (such as workers and material) the firm does change in the short tun to produce more) |
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total fix cost stays the same |
when output changes |
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it equals the firms total cost |
when output is zero (and thus when TVC=0) |
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since TFC stays the same as output goes up |
both TVC and TC go up by Marginal Cost when one more unit of output is produce |
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tvc is the sum of |
marginal cost |
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as Marginal Cost is falling in the section of increasing marginal returns |
Total Variable Cost increases, but each increase becomes smaller as Marginal Cost becomes smaller. |
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total cost is the sum of total fixed cost and total variable cost |
TC=tfc and TVC |
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total variable cost |
at any level of output is the sum of all marginal cost up to that level of output |
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total cost and total variable cost go up |
by marginal cost |
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average cost |
is the cost per unit or total cost divided by total output |
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how average and marginal cost are related |
MC IF MC = ATC, ATC stays the same if MC>ATC, ATC goes up |
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avc depends on how it compares to MC |
IF MC < AVC; AVC goes Down
IF MC= AVC ; AVC stays the same
IF MC > AVC; AVC goes up |
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the average cost curve moved towards the marginal cost curve as output increases |
in general |
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when output expands, as long as marginal cost is smaller than average cost, AVC falls.
MC equals AVC at the minimum AVC. then MC exceeds AVC and AVC rises |
remember |
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average cost moves towards marginal cost |
average cost |
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average fix cost becomes smaller as |
output expands |
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at the Minimun average total cost |
MC = ATC at the minimun average variable cost, MC= AVC |
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in the longrun, all inputs can be increased so that the law of diminishing marginal returns need not to apply |
LONG run |
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the long-run average cost curve shows the lowest ATC at which each level of output can be produced |
long run |
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economics of scale |
when an increase in all inputs result in a greater than proportionate increase in output, the firm experiences economies of scale
LRATC falls
better utilization of equioment and specialization |
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Constant return scale |
when an increase in inputs increases output proportionately the firm experiances constant return to scale
LRATC remains the same |
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decreasing return to scale |
when an increase in inputs increases output less than Proportionately, the firm experiences decreasing returns to scale
LRATC rises |
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each firm has 2 types of cost |
explicit costs- it pays for inputs, these are the cost recorded by accountants
implicit cost- owners times and investment in the firm. |
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accounting profits ignores implicit cost |
so it overstate the firms true economic profit |
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economic profit |
is the excess of revenue over the firms costs when cost included explicit ad implicit cost |