Short-Run Production
Define fixed input.
An input than cannot be changed in the short run
Define fixed, variable, and total costs.
Fixed: remains constant regardless of the output
Variable: changes depending on the output
Total: the sum of all fixed & variable costs
How does long-run production vary from short-run production?
Long-run production: all costs are variable
Short-run production: some costs are fixed
What are the key characteristics of a perfectly competitive market?
Many firms, identical products, easy entry/exit, price takers.
What is the formula to find profit?
Profit = Total Revenue - Total Costs
What is marginal product?
Additional output from using one more unit of input.
What is marginal cost?
The additional cost of producing one more unit
Why do all costs become variable in long-run production?
Firms adjust all inputs in order to optimize production.
What determines the market price in a perfectly competitive industry?
The intersection of market supply and demand.
When does a firm earn profit?
Price is greater than average total cost
Explain the Law of Diminishing Returns
As more of a variable input is added, the marginal product eventually declines.
When does marginal cost intersect average total cost?
At their minimum points
Define diseconomies of scale.
As output increases, LRATC increases.
If all firms in a perfectly competitive market are earning losses, what will occur in the long-run?
Firms will exit the market, decreasing supply and driving up the price until there is zero economic profit.
When does a firm break even?
When price = average total cost
When does diminishing returns set in?
When marginal product starts to decrease.
What does it mean when a firm is producing in economies of scale?
Long-run average total cost (LRATC) decreases as output increases.
What are constant returns to scale?
LRATC remains the same as output increases.
True
P=MR
When does a firm shut down?
If a firms total product increases from 75 to 130 when It hires one more worker, what is the marginal product of that worker?
55 units
What is the shutdown rule?
A firm is better off ceasing production if price is less than average variable cost in the short run.
Why do firms earn zero economic profit in the long run under perfect competition?
Because the entry and exit of various firms in the market pushes prices to the level of minimum average total cost, eliminating economic profits.
Why is the long-run equilibrium of a perfectly competitive market considered both allocatively and productively efficient?
Price = marginal cost (allocative efficiency)
Price = minimum average total cost (productive efficiency)
What is accounting profit?
A company's' total revenue minus its explicit costs (out of pocket expenses)