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14 Cards in this Set
- Front
- Back
Industrial Organization
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The study of how firms' decisions about prices and quantities depend on the market conditions they face.
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Explicit and Implicit Costs
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Explicit costs- opportunity costs of production that require the payment of money (e.g. paying wages to workers)
Implicit costs- opportunity costs of production that do not require money payment (e.g. the opportunity cost of the owner's time) Economists account for both while accountants only account for explicit costs |
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Production Function
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Relationship between the input to produce a product and the output of the product.
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Marginal Product
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The increase in output that arises from an additional unit of input. It is the slope of the production function.
Marginal Product of Labor = Change in output / Change in labor |
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Diminishing Marginal Product
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The property whereby the marginal product of an input declines as the quantity of the input increases.
Ex) Too many workers means they have to share equipment which lowers the production rate |
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Total-cost Curve
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Shows the relationship between the quantity produced (horizontal axis) and the total costs (vertical axis)
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Fixed and Variable Costs
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Fixed costs- do not vary with the amount of output produced (rent, permanent jobs, etc.)
Variable costs- changes as the company changes the amount of output (supplies, wages, etc) Total cost = fixed costs + variable costs |
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Average Total Cost
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= Total cost / Quantity of output
Or AFC + AVC |
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Average Fixed Cost
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= Total fixed cost / Quantity of output
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Average Variable Cost
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= Total variable cost / Quantity of output
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Marginal Cost
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The increase in total cost that arises from an extra unit of production. The marginal cost crosses the average total cost at the minimum of the average total cost.
MC = Change in total cost / Change in quantity |
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Efficient Scale
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The amount of output that minimizes ATC
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Economies of Scale
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Occurs when increasing production allows greater specialization: workers more efficient when focusing on a narrow task. More common when Q is low. ATC falls as Q rises
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Diseconomies of Scale
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Due to coordination problems in large organizations. (e.g. management becomes stretched, can't control costs). More common when Q is high. ATC rises as Q rises.
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