Econ Chp. 13

Front 1

Industrial Organization

Back 1

the study of how firm's decisions about prices and quantities depends on the market conditions they face

Front 2

Total Revenue

Back 2

The amount a firm receives for the sale of its output

Front 3

Total Cost

Back 3

The Market value of the inputs that a firm uses in production

Front 4

Profit

Back 4

Total revenue Minus Total cost

Front 5

There are 2 kinds of Total Cost

Back 5

Accounting: Takes into account only EXPLICIT costs (money leaving the firm)

Economic: Takes into account Explicit & IMPLICIT costs (not only money leaving the firm, but the opportunity costs of running the firm as well)

Front 6

Explicit Costs

Back 6

Input costs that require an outlay of money by the firm

Front 7

Implicit Costs

Back 7

Input costs that do not require an outlay of money by the firm

Front 8

An important implicit cost of almost every business is the opportunity cost of the financial capital that has been invested in teh business

Back 8

true

Front 9

Two kinds of profit

Back 9

Economic Profit:The total revenue minus total cost, including both explicit and implicit costs

Accounting Profit: Total revenue minus total explicit Costs

Front 10

When a firm is making economic losses then the business owners are failing to earn enough revenue to cover all the costs of production

Back 10

true

Front 11

Production Function

Back 11

The relationship between quantity of inputs used to make a good and the quantity of output of that good

Front 12

Marginal Product

Back 12

The increase in output that arises from an additional unit of input

Front 13

Diminishing Marginal Product

Back 13

The property whereby the marginal product of an input declines as the quantity of the input increases

Front 14

The slope of the production function measures the marginal product of a new unit of input

Back 14

true

Front 15

Fixed Costs

Back 15

Costs that do not vary with the quantity of output produced

Front 16

Variable Costs

Back 16

costs that vary with the quantity of output produced

Front 17

Total cost =

Back 17

Fixed + Variable Costs

Front 18

Average Total Cost

Back 18

Total Cost divided by the quantity of output

Front 19

Average Fixed Cost

Back 19

Fixed cost divided by the quantity of output

Front 20

Average Variable Cost

Back 20

Variable Cost divided by the quantity of output

Typically rises as output increases because of diminishing marginal product.

Front 21

Marginal Cost

Back 21

The resulting increase in Total cost caused by 1 extra unit of production

Rises with quantity of output produced (this fact represents the property of diminishing marginal product)

Front 22

Average Total Cost =

Back 22

ATC = TC/Q

Front 23

Marginal Cost =

Back 23

Change in TC / Q

Front 24

The two primary metrics to keep in mind when trying to determine level of production are

Back 24

Average Total Cost

Marginal Cost

Front 25

The average total cost curve is U shaped because of the "tug of war" between average fixed costs and average variable costs

Back 25

true

Front 26

The efficient Scale

Back 26

The quantity of output that minimizes average total cost (the bottom of the U shape)

Front 27

Explain why/how the efficient scale minimizes ATC

see page 274 & 277

Back 27

AT lower levels of output than the efficient scale point, average total cost is higher than ATC bc the fixed costs are spread over so few u nits.

At higher levels of output beyond the efficient scale point the ATC is higher because the marginal product of inputs has diminished significantly.

At the efficient scale point these two forces are balance to yield the lowest average total cost

Front 28

Whenever Marginal cost is less than the average total cost, average total cost is falling.

Whenever Marginal Cost is greater than average total cost, average total cost is rising

Back 28

True for all firms--Therefore the intersection of the MC curve with the ATC curve is the efficient scale

think of GPA & the marginal grade

Front 29

Marginal Cost eventually rises with Quantity of output

Average Total Cost curve is U-Shaped

The marginal cost curve crosses the average total cost curve at the minimum of average total cost

Back 29

true--3 important points to remember

Front 30

Because many decisions are fixed in the short run but variable in the long run, a firm's long-run cost curves differ from its short run cost curves

Back 30

true

Front 31

Review pg 280

Back 31

now!

Front 32

When long run average total cost declines as out put increases there are said to be_____

Back 32

Economies of scale

the property whereby long run average total cost falls as the quantity of output increases

Front 33

Dis economies of scale

Back 33

The property whereby long run average total cost rises as the quantity of output decreases

Front 34

Constant Returns to scale

Back 34

when long run average total cost does not vary with the level of output, there are said to be constant returns to scale

Front 35

Reasons why Economies of Scale often arise because higher production levels allow for ______

Back 35

Specialization among workers

(Experience curve)

Front 36

Coordination Problems

Back 36

One of the possible reasons for DisEconomies of scale. Inherent in any large organization.

The more/larger the production the more stretched the managment team, the logistics, the red tape, could cause decrease in efficiency