The Production Function (3.1)
Define fixed and variable input.
Fixed input: quantity cannot be varied for a period of time.
Variable input: quantity can vary at any time.
What is average total cost (ATC)?
Average Fixed Cost (AFC) + Average Variable Cost (AVC)
AND
Total Cost (TC) / Quantity (Q)
What is the difference between accounting profit and economic profit?
Accounting profit is the total revenue minus the explicit cost (and depreciation but we don't care about that I think), whereas economic profit is total revenue minus opportunity cost of resources (Explicit + Implicit).
(could also think of it as Economic profit = Accounting profit - Opportunity Cost/Implicit Cost)
What mneomonic device is used to remember all of the curves represented by the horizontal line at the market price for a perfectly competitive firm?
MR. DARP
Marginal Revenue (MR) = Demand (D) = Average Revenue (AR) = Price (P)
Not totally related but what is the demand curve of a price-taking firm?
What is the short-run supply curve for a firm in a perfectly competitive industry?
Horizontal (perfectly elastic).
Firm's marginal cost curve ABOVE minimum AVC.
What units is marginal product (MP) in?
Additional quantity of output produced by one more unit of that input (not in dollars basically...)
What is the diminishing returns effect?
What is the spreading effect?
When output increases, marginal product decreases, leading to an increase in the amount of variable input needed to produce one more units, which leads to an increase in average variable cost (AVC).
When output increases, the quantity of output increases over which fixed cost (FC) is spread, decreasing average fixed cost (AFC).
Low levels of output: spreading > diminishing returns
High levels of output: spreading < diminishing returns
At minimum ATC: spreading = diminishing returns
When is profit maximized?
SAY IT WITH ME!
MR = MC
MR = MC
MR = MC
MR = MC
MR = MC
What is the relationship (>, =, or <) between TR and TC as well as ATC and P when a firm is profitable, breaks even, or incurs a loss.
Profitable: TR > TC, P > ATC
Breaks even: TR = TC, P = ATC
Incurs a loss: TR < TC, P < ATC
What does a downward-sloping industry supply curve indicate?
A decreasing-cost industry.
What is the relationship between the marginal product of labor and the total product curve?
Marginal product of labor is the slope of the total product curve (MPL = change in quantity of output / change in quantity of labor)
Why is the ATC curve U-shaped?
As output increases, AFC decreases but AVC increases, so it first falls but then as AFC becomes a less significant part of ATC (approaching 0) and AVC becomes more significant (approaching ATC), it rises, creating that distinct U-shape.
What does it mean when economic profit is > 0, < 0, and = 0. Also, what do you know about accounting profit if economic profit = 0?
Economic profit > 0: best use of resources
Economic profit < 0: there is a better alternative use
Economic profit = 0: normal profit (just high enough to keep firm engaged in current activity, and it means accounting profit must be positive!)
What is the Shut Down Rule?
A firm produces as long as P > AVC. When P < AVC, shut down to minimize losses (indifferent when P = AVC but assume they will keep producing...)
*MINIMUM AVC IS THE SHUT DOWN POINT
What is a constant-cost industry? What is its LRS (long-run industry supply curve)?
An industry where the firms' cost curves are unaffected by changes in the size of the industry. This industry is characterized by a horizontal LRS (perfectly elastic).
Define the long-run and the short-run. Is 1 year long-run or short-run?
Long-run: all inputs can be varied.
Short-run: at least one input is fixed.
TRICK QUESTION AHHAAH: long-run and short-run are not defined by set periods of times, they are defined by the variability of inputs.
Describe (and graph if you are able to class - Mr. L) a long-run ATC that illustrates when you have economies of scale, diseconomies of scale, and constant returns to scale.
I can't enter a drawing cuz I'm broke and not subscribed to JeopardyLabs but imagine the U-shape and then you have economies of scale when long-run ATC decreases as output increases, constant returns to scale as output increases proportionally to input increase (flat part of the curve) and finally diseconomies of scale when long-run ATC increases as output increases (caused by decreasing returns to scale).
In perfect competition, firms in the long-run earn this type of profit, ensuring resources are efficiently allocated.
Normal Profit :)
What's a market that has low barriers to entry? What's a market that has high barriers?
Low barriers: a market that has more competition and individual firms make less profit
High barriers: a market that has less competition and individual firms make more profit
What happens when additional firms enter the industry? What happens to total output?
Quantity supplied increases, so short-run industry supply curve shifts right, lowering market price. Then existing firms respond by reducing output, but total industry output will increase because of the larger number of firms in the industry!
What is the rule of diminishing marginal returns, and what mitigates it?
When the quantity of one input increases, holding all others fixed, leads to a decrease in the marginal product of labor of that input. It is mitigated by investments in capital and technology.
What is the name of the point that represents the lowest cost per unit a firm can achieve in the long-run, where economies of scale are fully exploited before diseconomies of scale set in? Bonus +200: what happens when this number is large and what happens when it's small?
Minimum efficient scale! (When the quantity is large, you could have a monopoly. When the quantity is small, you have competition)
At the profit-maximizing quantity, this distance between two curves represents total profit on a cost curve graph.
The vertical distance between MR=D=AR=P and ATC.
Total Profit = (P - ATC) x Q
In the short-run, a firm will continue to produce as long as price covers this cost, while in the long-run, firms exit the market if price falls below this cost.
Short-run: average variable cost (AVC)
Long-run: average total cost (ATC)
Ask yourself: why do we consider AVC in the short-run but ATC in the long-run? What is the difference between the two?
What are the 2 kinds of efficiencies (both present in perfectly competitive industries!)? Define them too please.
I wouldn't say this is worth +500 but it's midnight and I'm struggling to swap the spots so....congrats to whoever got it!!! #3rdBlockEconRules
Productive efficiency - producing at the lowest possible cost (where P = minimum ATC)
Allocative efficiency - producing at the amount most desired by society (P = MC)