Short Run and Long Run Production Costs
How will the production costs behave in the short run?
Production cost will remain unchanged.
How do you calculate Marginal Revenue?
Chang of Total Revenue/Change of Quantity
What is the formula for Economic Profit?
EP=Total Revenue - (Explicit Costs + Implicit Costs)
What is the Shut-down rule?
TR<VC
What is perfect competition?
A perfect competition is a kind of market in which the number of buyers and sellers is very large.
Which costs can be avoided in short run?
Fixed costs can’t be changed but, variable costs can be changed.
What is the Profit Maximization rule?
MR=MC
What is the difference between explicit and implicit costs?
Explicit cost is money spent on materials, utilities, labor, rent, and capital. Implicit cost is the money value of one’s opportunity cost.
What needs to happen in order to operate in the short run?
In order to operate in the short run, the firm’s Total Revenue must cover its Variable Costs.
What are the advantages and disadvantages of perfect competition?
Advantages: Lower prices for consumers and increased efficiency through innovation.
Disadvantages: Lack of product differentiation and potential market instability.
Are there fixed factors in the long run?
There are no fixed factors in the long run.
What happens when Total Revenue is greater than Total Cost?
Firms are earning a profit.
Is economic profit always lower than accounting profit?
Yes, it is always lower than accounting profit.
What should be considered when determining if a firm is earning a loss?
If a firm is earning a loss, it must consider whether it is better to stay open and continue to lose money or shut down temporarily to minimize its losses.
How does perfect competition affect the economy?
Positive economic profits will attract competition as other firms enter the market.
What costs should be covered in the long run?
A firm must cover all costs of production.
What do rational firms use?
Marginal Analysis
What is the relationship between accounting and economics?
Economics observes the behavior of buyers and sellers, and accounting provides useful data to them for making decisions.
How do you know if firms will enter or exit in the long run?
An increase in demand will create economic profit in the short run and induce entry in the long run.
When does a perfect competition occur?
Perfect Competition occurs when there are many sellers.
Why do long run average cost fall?
The long run average costs fall as more output is produced.
What needs to happen in order to maximize profit?
Firms will continue to produce as long as the marginal revenue earned from and additional product is greater than or equal to the marginal cost of that additional product.
What is the formula for Accounting Profit?
Accounting Profit=total revenue - explicit costs
How do you know if a firm will produce in the short run?
If price falls below average total cost, but remains above average variable cost.
What is the formula for perfect competition?
Perfect Competition: P=MC