Production and Costs
What is the law of diminishing marginal returns?
As more units of a variable input are added to fixed inputs, marginal product eventually decreases.
What is a factor market?
A market where productive resources (land, labor, capital) are bought and sold.
Factor Markets: What is the difference between the product market and the factor market?
Product market: goods/services are bought and sold; Factor market: resources like labor and capital are traded.
Government and Market Failures: What is the purpose of a subsidy?
To encourage production or consumption of a good with positive externalities.
Basic Economic Concepts: What does “ceteris paribus” mean in economic analysis?
“All other things being equal” – it isolates the effect of one variable by holding others constant.
What is marginal cost (MC)?
The additional cost of producing one more unit.
Define marginal revenue product (MRP).
MRP = marginal product × marginal revenue.
Basic Economic Concepts: What type of economy relies primarily on custom, habit, and ritual to make economic decisions?
A traditional economy.
Production and Costs: What does increasing marginal returns mean in the short run?
Each additional input adds more output than the previous one.
Market Structures: What is a key characteristic of an oligopoly?
Few large firms dominate the market and may engage in strategic behavior (like price leadership or collusion).
What is the shape of the marginal cost curve, and why?
U-shaped due to increasing, then decreasing marginal returns. (Nike swoop)
How does a firm decide how many workers to hire in a perfectly competitive labor market?
Hire until MRP = wage.
Supply and Demand: What happens to equilibrium price and quantity when supply decreases and demand remains constant?
Price increases, quantity decreases.
Elasticity: What does it mean if the cross-price elasticity of demand is negative?
The goods are complements.
Government and Market Failures: What type of good is both non-excludable and non-rival?
A public good.
At what point does the marginal cost curve intersect the ATC and AVC curves?
At their minimum points.
What causes the labor supply curve to shift?
Changes in preferences, population, alternative opportunities.
Basic Economic Concepts: What is the difference between absolute advantage and comparative advantage?
Absolute: who can produce more; Comparative: who has the lower opportunity cost.
Production and Costs: If marginal cost is below average total cost, what happens to ATC?
ATC decreases.
Factor Markets: How does a minimum wage above the equilibrium wage affect the labor market?
It creates a surplus of labor (unemployment).
Explain the difference between the short run and the long run in production.
Short run: at least one input is fixed; long run: all inputs are variable.
What is economic rent?
or Why is the marginal revenue product (MRP) curve also the firm's demand curve for labor in a perfectly competitive market?
Payment to a factor of production above what is necessary to keep it in its current use.
or Because MRP shows the additional revenue generated by each additional unit of labor, and firms hire labor up to the point where MRP = wage, making it the firm's demand for labor.
Supply and Demand: Explain how expectations about future prices can shift current supply or demand.
If sellers expect higher future prices, current supply decreases. If buyers expect higher prices, current demand increases.
Market Structures: Why is there no long-run economic profit in monopolistic competition?
Because low barriers to entry mean firms enter when profits exist, shifting demand leftward until profits are zero.
Elasticity: A firm faces a perfectly inelastic demand curve. What pricing power does it have?
It can raise prices without losing quantity demanded, but this is rare and usually theoretical.