Vocabulary
What is a variable input?
Variable inputs are those that can be changed in the short run to change production.
Marginal Product Formula
Change in Total Product / Change in Labor
How does the profit-maximizing rule of setting P = MC leads a perfectly competitive market to be allocatively efficient.
In a perfectly competitive market, following the P = MC rule allows for firms to ensure that they are maximizing profit where the buyers and sellers agree on a price (equilibrium price) that is in accordance with the demand, supply, and etc.
When total product is at its maximum, what is marginal product?
Marginal product is zero.
What is total cost?
Total cost is the sum of fixed and variable costs?
What is a fixed input?
An input that cannot be changed in the short run to adjust production.
Average Product Formula
Total Product / Labor
In the long run, a perfectly competitive firm will make what?
Zero economic profit.
When marginal product is greater than average product, what is average product doing?
Average product is rising.
Marginal Cost Formula
Change in Total Cost / Change in Quantity
What is a short run?
A short run is a period of time during which there are fixed inputs and the period of time is too short for a firm to alter its plant capacity.
Average Fixed Cost Formula
Fixed Cost / Quantity
Assume that in the short run at the profit-maximizing output, the price is lower than average variable cost. The perfectly competitive firm should do what?
Shut Down.
When marginal product is less than average product, what is average product doing?
Average product is falling.
What is Increasing Returns to Scale?
Increasing returns to scale is when the output is increasing faster than all inputs.
A long run is a period of time during which a firm is able to change all of its inputs and is long enough for it to alter its plant capacity.
Average Variable Cost Formula
Variable Cost / Quantity
Assume that a perfectly competitive firm is operating where marginal revenue is greater than marginal costs. To increase profits, the firm should do what?
Increase production.
A firm's short-run marginal cost curve will eventually increase because of what?
Diminishing Marginal Returns.
What is Decreasing Returns to Scale?
Decreasing returns to scale is when the output is increasing slower than all inputs.
What are fixed and variable costs?
Fixed costs are those that must be paid even when the firm's output is zero, meanwhile a variable cost is one that changes.
Average Total Cost Formula
Total Cost / Quantity OR AFC + AVC
What two rules does a perfectly competitive firm apply to determine its profit-maximizing quantity of output?
A perfectly competitive firm will determine its profit-maximizing level of output on the basis of marginal cost and marginal revenue.
Allocative and productive efficiency are possible in what unregulated market structures?
Perfectly competitive only.
Marginal Revenue Formula
Change in Total Revenue / Change in Quantity