##### Economics final

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1

Profit Formula

Total revenue-Total Cost

2

Accounting profit formula

Total Revenue-Explicit Costs

3

economic Profit

Total revenue-(explicit costs + implicit costs)

4

What are explicit costs

Require outlay of money

5

What does economic profit tell you? Economic profit for firms?

How much better or worse your doing than your next best option.

For firms, 0 economic profit means earning normal rate of return in market

6

Why is accounting profit and economic profit different?

Accounts are trying to track money.
Economists are trying to explain decisions

7

What is production function?

Shows the relationship between the quantity of inputs used to produce a good and the quantity of output for that good

8

What forms can a production function come in?

Table, equation or graph

9

What is Average Product?

output per worker

10

Marginal product

11

MPL

Marginal product of labor

Tells us how much output increases with the last worker hired

12

Diminishing marginal product

Each additional input gives less extra production than the last.

Hire best workers first
Each additional worker hired has fewer resources to work with

13

Law of diminishing marginal productivity?

states as more of an input is added to a process, after some point the added output from the additional input will fall.

14

Why does MPL diminish

As a company hires more workers, each on increases production (up to a certain point), but by a smaller amount than the last

As we adder workers, the average worker no has fewer factors to work with, is less productive

Firms are intelligent in hiring and hire the most productive workers first

15

Diminishing absolute productivity

Below 0 marginal product

16

Total Cost formula

Fixed costs + Variable costs

17

Fixed cost

costs that cost the same no matter how much output is produced, overhead costs such as rent

18

Variable Costs

Costs that change as output changes, such as wages paid to workers, buying materials for production

19

What happens to the cost as more output is produced

increases

20

When deciding whether or not to produce another unit of output, firms look at what?

Marginal Cost

21

MC? formula?

Increase in total cost from producing more output
(Change in total costs) / (change in quantity)

Represents the cost of producing an additional unit

Increases as Q increases

22

Average total cost

TC/Q
How much does each unit cost on average

This is the cost per unit produced

Generally U-Shaped

23

Average fixed cost

FC/Q
How much of per unit cost comes from fixed expenditures (overhead)

Decreases as quantity of output increases

24

Average Variable Cost

VC/Q
How much of per unit cost comes from levels of inputs changing

25

What happens to the TC and VC curves as Q increases?

Increase

26

MC,ATC and AVC curves are..?

U-shaped

27

AFC curve is always ---- as Quantity increases?

decreasing

28

FC curve is always ----

constant

29

If marginal productivity is rising, then marginal costs are ??

falling

30

If average productivity is falling, average costs are ----?

Rising

31

Why is marginal cost will be equal to the average total cost at the minimum ATC?

When MC < ATC each additional unit reduces the average

When MC > ATC each additional unit increases the average

So MC= ATC at the minimum point on the ATC curve

32

The relationship between marginal coast and average cost?

The marginal cost curve goes through the minimum point of the ATC curve

33

Short- run decisions on the firm details?

Some inputs into production process are fixed

If the firm wants to increase or decrease production they have limited options about how to do so

34

Long-run production decisions?

No inputs are fixed

Firms can change levels of any and all inputs

Firms do not take level of technology, plant size as a given

Choose combinations of inputs and level of technology that offer the lowest cost

35

Main difference between short run and long run?

Long run does NOT have fixed costs. You can get out of a rent contract if you want over longer periods, for example, can switch from one factory to two factories and so on.
As a result, we generally think of long run ATC curves as being flatter than those in the short-run. This means firms find the most efficient way to produce good over longer time periods.

36

What will the long-run cost curve (ATC) look like?

We expect that, as production increases, long run ATC will decrease at first
Economies of scale: when ATC decreases as Q increases, which means the firm is getting more efficient as they produce more
Constant returns to scale- ATC stays the same as Q increases
Diseconomies of Scale: When ATC increases as Q increases, which means the firm is getting less efficient as they produce more

U-SHAPED

37

Why is it that production increases, long run ATC will decrease at first

Dividing setup costs among more units
Technical efficiency

This is Economies of Scale

38

We expect ATC to start to increase as we continue to increase the level of production. Why?

Increasing Monitoring costs

Diminishing marginal product

Resource depletion

39

Terminology?

Minimum efficient level of production: the level of production at which the economies of scale for the firm are exhausted, where the long-run curve flattens out

Economies of Scale

40

Difference between short-run and long-run production is...?

Flexibility to change all levels of all inputs

41

Economies and diseconomies of scale describe what?

Relationship between costs and production

42

Economists normally assume the goal of a firm is to earn....?

Profits that are as large as possible, even if that means reducing output and even if that means higher total costs

43

Implicit costs....?

Do not require an outlay of money by the firm

44

A Firm would never choose to continue production when earning 0\$ in economic profit. True or False?

False

45

How do economists distinguish between the short run and the long run?

By looking at the period of time in which certain inputs and costs are fixed

46

What are the characteristics of a perfectly competitive market?

Each buyer and seller is a price taker
Homogeneous products
Free entry and exit of firms
Complete information
Firms maximize profit

47

What firms decisions are we interested in?

How much to produce
What price to charge
How many workers to hire

48

What factors influence these decision?

Costs
Actions of those in supply chain
Demand factors
Level of competition in the market

49

Economists normally assume that a goal of a firm is to....?

Maximize profit

50

What best describes the nature of most production functions?

Output increases at a decreasing rate with additional units of input

51

The amount of money that a wheat farm could have earned if he had planted barley instead of wheat is an example of ...?

An implicit Cost

52

The cost of producing an additional unit of output is the firm's...?

Marginal Cost

53

Firms are price takers?

This means that the decision of the firm is to look at the market price and costs and decide how much to produce.

Increasing the quantity won't change market price

As a result, Marginal Revenue is constant and always equal to price

54

Free entry and exit of firms?

Means that if firms in a certain industry are making large profits, there is nothing blocking other firms from coming in and out and competing

55

Homogeneous Products?

56

If the conditions of perfect competition are met then..?

Economic forces operate perfectly
Firms that can afford to produce and sell do
If factors change in the market, supply and demand will adjust to bring back to equilibrium

57

As a result of firms being price takers, MR is...?

constant and always equal to price

58

Firm maximizes profits by producing quantity where MR=MC....Explain the inequalities?

If MR > MC, you get more than cost for next unit, so produce more.

If MR < MC, you get less than cost for next unit, so produce less

Stop at the level of production where MR=MC

59

Monopoly firms makes decisions based on what?
Competitive firms make decision based on what?

Price and Quantity
Maximizing profit

60

Decision in the short run: shut down or produce?

Shut Down if P is less than AVC. This would mean that you could not cover costs of day-day operations. At this point, fixed costs are sunk costs. Firms might be operating at a loss for a while if they are covering some fixed costs.

61

Decision in the long run: exit the market?

No fixed costs, so exit the market if P is less than AVC. (The price is not high enough to cover the average cost per unit.

62

What best describes the decision making of firms in a perfectly competitive market?

Firms have to primarily decide what quantity to produce.

63

If demand increases in the short run in a competitive market, we expect....?

Firms will make positive profits in the short run and more firms will enter

64

What is constant for a firm in a competitive market?

Price equals marginal revenue and marginal revenue is constant

65

If a competitive firm is currently producing at a level of output at which marginal revenue is less than marginal cost, then....?

A one-unit decrease in output will increase the firm's profit

66

What the most important for determining the level of profits firms will earn in the long run?

Ease of entry and exit in the market

67

What are the characteristics of a monopoly

On firm selling a particular product
No close substitutes
Firm sets the price
Barriers to entry

68

What is a monopoly?

Where a key resource required for production is owned by a single firm. Example: DeBeers owns most diamond mines

69

Barriers to entry?

Control of resources
Government regulation (such as patents)
Natural Monopoly

70

Natural Resources?

A single firm can produce output at a lower cost than a larger number of producers

Economies of scale

Example: Electricity production and walmart

71

Differences between Monopoly and a competitive firm

Competitive markets
Market demand curve is downward sloping
Demand curve for the firm is horizontal at market price
We assume a competitive firm can increase quantity without lowering price
MR=Price

Monopoly
Market demand curve is downward sloping
Monopolist is only firm in the market, so firm demand is market demand
To sell larger quantity, the firm will have to lower price

72

Monopolist revenue formula

Price times Quantity

73

Monopolist Marginal Revenue Formula

Change in TR/Change in Q
Revenue for each additional unit of output
Changes as quantity changes
MR<Price

74

For a monopolist, increasing quantity sold has two effects?

Output effect
Price effect

75

Output effect?

Increase quantity
Increase TR

76

Price Effect

Decrease price
Decrease TR

77

In order to sell more in a monopoly, you have to do what?

Lower the price. MR<P

This means that total surplus is no longer maximized

78

What is the profit maximizing condition of a monopolist?

MR=MC

79

Monopolists profit formula

(price-ATC) times Quantity