Why are short-run unit cost curves u-shaped?

because of Diminishing Marginal Returns

at first, productivity (MP_L AP_L) increases, and the decreases at the point of DMR

because in the short-run, some inputs are fixed

what does a short-run unit cost curve

with marginal cost and average total cost look like?

[image]

how does the Marginal Product of Labor and

Average Product of Labor compare to the graph of Marginal Cost and and Average Total Cost?

Explain

[image]

the peak of productivity is the minimum marginal cost

the maximum of the Marginal Product of Labor curve is the ....

minimum of the Marginal Cost curve

The maximum of the Average Product of Labor curve is ...

the minimum of the Average Total Cost curve

general rule:

when a constant is divided by something decreasing....

the result must increase

How are productivity measures and

unit cost measures related?

inversely

what measures are key to unit cost measures?

- Marginal Cost

- Average Total Cost

- Average Variable Cost

what does the graph of unit costs look like?

On the Unit Cost Curve graph, where is

Average Fixed Cost ?

What shape are long-run productivity curves?

they might be u-shaped

what do long-run productivity costs involve?

it measures what happens to output when more of

ALL inputs are used

what happens to output as we change the size or "scale" of the firm?

as a firm gets bigger (more output, larger size), efficiency and productivity might increase (unit costs decrease)

this is Increasing Returns to Scale

what is Increasing Returns to Scale?

as a firm gets bigger (more output, larger size), efficiency and productivity increase (unit costs decrease)

What are reasons for Increasing Returns to Scale?

1) Specialization of labor and management (increase in employees)

2) large output justifies spending on new technology

3) inputs can be purchased in bulk for discounts

4) by-product can be recycled, re-used, sold, etc.

With Incrasing Returns to Scale

increase in the size of the firm leads to...

increase in efficiency

decrease unit costs

With Increasing Returns to Scale

if you increase all inputs by 50%,

output will...

output will increase by MORE THAN 50%

Explain Decreasing Returns to Scale

when a firm gets too big, and further increase

results in a decrease in efficiency and an increase in unit costs

What are the reasons for Decreasing Returns to Scale?

1) Corporate heirarchy (management layers) is too thick that decision-making is slow

2) lack of labor oversight/shirking

With Decreasing Returns to Scale

an increase in the size of a firm results in...

decrease in efficiency

increase  in unit costs

With Decreasing Returns to Scale

if you increase the use of all inputs by 50%...

output will...

increase by less than 50%

When does Constant Returns to Scale occur?

when you increase the size of the firm and there is

- no change in efficiency

- no change in unit costs

What does a firm's long-run Unit Cost Curve graph look like?

IRTS, CRTS, DRTS

What is perfect competition?

when there are many, many small firms selling a standardized product in an environment characterized by "free" entry and exit and "free" information

what is a standardized product?

and when is it necessary?

all firms' products are exactly the same

and are

perfect substitutes for each other

necessary for perfect competition

what does "free" refer to?

few barriers

in Perfect Competition

what does the demand curve look like for the

whole market and a single firm?

what is a price taker?

the market determines the price each firm will accept

in Perfect Competition

a firm's demand curve is the same as it's

Marginal Revenue curve

This is the only time when demand is perfectly elastic

P* = Marginal Revenue

Why can't a perfectly competitive firm increase price?

because there are so many substitutes

any Price above P* results in Quantity Demanded = 0

Why shouldn't a perfectly competitive firm lower price?

no reason to because they can

sell any Quantity Demanded at P*

What is the general rule for production?

if Marginal Revenue > Marginal Cost = PRODUCE!

or

Produce up to where

Marginal Revenue = Marginal Cost

For the Perfect Competition

What is the Profit Maximizing Rule?

Q* is where Price = Marginal Cost

For Perfect Competition firms

we know that P* is...

Marginal Revenue

Which 3 lines have the same slope?

slope of the tangent line to Total Cost

slope Total Cost at Profit Maximizing

slope of Total Revenue

For firms, what is the formula for Profit?

Profit = Q* (Profit - Average Total Cost)

Where is Profit on the Cost graph?

where is Total Cost on the Cost graph?

Long-Run Competitive Equilibrium

Under Perfect Competition the market will eventually reach a point where firms have no reason to exit and new firms have no reason to join.

number and size of firms is stable

In the long-run

if economic profit > 0

firms will...

enter the market, increasing Supply (shift right)

this will decrease P* until P* = ATC

economic profie = 0, firms will stop entering market

In the long-run...

if economic profit < 0

firms will...

exit, decreasing Supply (shift left) until P* = ATC

economic profit = 0 so firms stop leaving

In Long-Run Competitive Equilibrium...

Regardless of positive or negative economic proft, what eventually happens?

economic profit = 0 and P* = ATC (minimum)

What does the graph of Long-Run Competitive Equilibrium look like?

What do you do when P* < Average Variable Cost?

produce nothing, "shut down"

in the short-run the best you can do is a loss

if you don't you spend more money than is coming in

If P* is above minimum AVC, how do you find out Q*?

you "bounce" price off of the Marginal Cost curve

Marginal Cost curve is the same as the Supply curve

What is a monopoly?

when there is a single seller of a unique product

there are no close substitutes

what is a monopolists strategy?

restrict supply

stimulate demand via advertising

What are the 3 barriers to Entry in a Monopolist Market?

1) Economic barriers

2) Legal Barriers

3) Technological barriers

what are economic barriers?

a) ownership of resource supply (diamonds)

b) large scale cost advantage

-IRTS and a network for providing a good/service

-AT&T and beginning a phone service; huge initial cost and after that marginal cost is very low

Why would a government grand a monopoly?

it is more efficient (lower costs) to have one network

they also regulate based on "fairness"

What are legal barriers?

a) patents - exclusive rights to produce and sell a good

b) government licenses - taxi cabs, NC liquor, NC lottery

What are technological barriers?

a) technological superiority - (short-lived) - IBM in the beginning; Xerox machines

b) technology may create a natural monolopy

ex) operating systems