Term
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Definition
an economic institution that transforms factors of production into goods and services.
1) Firms organize factor and/or
2) produces goods and/or
3) sells produced goods to individuals, businesses, or government
Firms are important because they control in the production process |
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| a firm which subcontracts out all production |
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| Profit = Total Revenue - Total Cost |
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| explicit revenue - explicit costs |
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Definition
| implicit and explicit revenue - implicit and explicit costs |
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| implicit revenues and costs |
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Definition
implicit costs: includes opportunity costs of the factors of production provided by the owners of the business
implicit revenue: increase in the value of assets |
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| costs of undertaking trades through the market. Internal production reduces transaction costs but can increase costs in other ways (involves command and control and is not subject to the competition of the market) |
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Term
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Definition
the contribution that each stage of production makes to the final value of a good. The firms total output minus the cost of inputs bought from other firms. i.e. you spend 400 on component parts and sell the output for 600, the value added is 200
the value added of all stages of production must = 100% |
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Term
| difference between the long run and the short run |
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Definition
in short run all some inputs are fixed, but in the long run all inputs are variable.
the long and short run are not specific periods of time. They are only concepts. Most firms will never truly reach the long run. |
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| shows the output resulting form various combinations of factors of production or inputs |
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| the additional output gained from an additional worker (input), all other inputs constant |
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| output per worker (input). This is the total output divided by the number of workers (quantity of inputs) |
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Definition
| the relationship between the inputs (factors of production) and outputs. tells us the maximum amount of output that can be derived from a given number of inputs. |
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Term
| Where are firms most likely to operate on a production funtion |
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Definition
| the areas of diminishing marginal productivity and falling average product |
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Term
| law of diminishing productivity |
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Definition
as more and more of a variable input is added to an existing fixed input, eventually the additional output one gets from that additional input is going to fall
sometimes known as the flowerpot law because if it did not hold true, the entire world'd food supply could be grown in one flowerpot. However as one adds more seed, the productivity of additional seeds falls, eventually by adding more seed the productivity of the entire flowerpot falls as a result |
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Definition
Those costs that are spent and cannot be changed in the period of time under consideration. Fixed costs are assumed to be sunk costs
example: Rent on a building |
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Definition
| Costs that change as output changes. As output increases variable costs also increase |
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Definition
| the sum of fixed and variable costs |
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Definition
Total Cost divided by Quantity (TC/Q = ATC)
or
AFC+AVC = ATC |
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Term
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Definition
| fixed cost divided by quantity produced (FC/Q = AFC) |
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Definition
| variable cost divided by quantity produced (VC/Q = AVC) |
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Definition
the increase in total cost from increasing the level of output by one unit
the decrease in total cost from decreasing the level of output by one unit |
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| what happens to average fixed cost curve as output increases |
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Definition
| the AFC curve falls because the same fixed costs can be spread over a wider range of output |
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| In the short run, how can you raise output? |
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Definition
| by increasing the variable input(s). Watch out for the law of diminishing marginal returns. |
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| what happens when marginal and average productivities fall? |
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Definition
| when marginal productivity falls, marginal costs must rise and when average productivity falls, average costs must rise. These two are not necessarily related |
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| Why are short-run costs curves U shaped |
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Definition
| They are U shaped because it is assumed that at low levels of production, marginal and average productivity are rising, therefore costs are falling. And, if the law of diminishing marginal utility holds true, then eventually productivity will fall, and with that costs will rise |
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| If marginal cost is below the AVC and ATC curves, what is happening to these curves |
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Definition
| these curves are falling. Even though MC is rising. These curves will rise when MC is above them. |
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| What about when MC is above the AVC and below the ATC |
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Definition
| in this area, since ATC is a combination of AVC and AFC, and AFC is falling, a small rise in the AVC does not do much to the ATC. Or once marginal cost is above AVC, as long as AVC doesn't rise more than fixed costs fall, then ATC will still fall |
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| Which curves are mirror images of each other? |
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Definition
| The average variable cost curve and marginal cost curve are mirror images of the average product curve and the marginal product curve, respectively |
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| Formula for the relationship between MC and ATC |
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Definition
| If MC>ATC, then ATC is rising
if MC=ATC, than ATC is constant
If MC |
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| perfectly competitive market |
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Definition
| a market in which economic forces operate unimpeded |
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| What does the demand curve for individual firms in a perfectly competitive market look like? |
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Definition
| it is completely horizontal (perfectly elastic |
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Definition
| the change in total revenue associated with a change in quantity |
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| what determines what happens to profit in response to a change in output |
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Definition
| Marginal revenue and marginal cost |
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Term
| for a perfect competitor, what does Marginal Revenue equal |
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Definition
| Price or market price (they are the same thing) |
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| The marginal revenue for a perfect competitor will be the same at all levels of output. True or False |
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Definition
| True (as long as the demand curve is constant) |
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| what is always the same for a perfect competitor? |
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Definition
| the marginal revenue and the demand curve the firm faces |
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Term
| point of profit maximization |
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Definition
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| When does it make sense to increase output? |
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Definition
| It makes sense to increase output as long as the marginal cost is below the marginal revenue. |
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Term
| The Marginal Cost Curve is also...? |
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Definition
| the supply curve. But above the average variable cost curve |
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Term
| does a firm want to increase total profit or profit per unit? Which would have a higher output? |
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Definition
| A firm wants to maximize total profit. Total profit is at a higher output |
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| Where will total profit be highest? |
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Definition
| at the profit maximizing level. To figure this out all you need is total revenue and total cost |
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| On a graph mapping Total Revenue and Total Cost, where is profit? |
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Definition
| The profit is the distance between the TR curve and the TC curve, the output level at which the distance between the curves is the greatest is the profit maximizing level |
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| Does the profit maximizing position maximize ATV, AVC or both? |
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Definition
| It does not necessarily maximize either |
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| Why doesn't a firm shut down if is making a loss? |
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Definition
| because the firm has not reached the shutdown point. Or the point at which it cannot cover its variable costs. Since fixed costs are sunk costs, the firm makes a smaller loss if it continues to produce. As long as the firm can cover its variable costs, it will continue to operate. |
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| Where is the shutdown point? |
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Definition
| the point at which price equals AVC |
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Term
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Definition
| the horizontal sum of all the firms' MC curves, taking into account any changes in input price that might occur |
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| The difference between the long run and the short run in regards to firms |
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Definition
in the short run
-- the number of firms is fixed
-- firms can either incur economic profit or loss
in the long run
-- firms can enter and exit the market
-- firms can only make zero economic profit |
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| The long run market supply curve is perfectly elastic in constant cost industries. True or False |
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Definition
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Definition
| factor prices do not increase or decrease as output increases |
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Definition
| factor prices rise as more firms enter the market and existing firms expand production |
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Definition
| factor prices fall as industry outpt expands |
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| in increasing cost industries what does the industry supply curve look like |
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Definition
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| in decreasing cost industries what does the industry supply curve look like |
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Definition
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| another difference between the short and long run |
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Definition
| in thee short run, the price does more of the adjusting, in the long run, the quantity does more of the adjusting |
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Definition
| costs that do not change with the output level |
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Term
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Definition
Many Sellers
Differentiated Products
Multiple dimensions of competition
Easy entry of new firms in the long run |
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| What does the monopolistic competitor's graph look like |
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Definition
| like the monopolist except the ATC will always be tangent to the point where price hits th demand curve, meaning there are no e-profits in the long run |
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