Economics 101: Test 3

Flash Card Set For A College Course In Economics.
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economic profit
total revenue - economic cost
economic cost
The opportunity cost of the inputs used in the production process; equal to explicit cost plus implicit cost
explicit cost
A monetary payment out of pocket to use resources owned by others.
implicit cost
An opportunity cost that does not involve a monetary payment
accounting cost
The explicit costs of production
accounting profit
total revenue - accounting cost
marginal product of labor (MP)
THe change in output from one additional unit or labor (worker)
MP = ∆Q / ∆L
Law of Diminishing Returns
As more variable inputs are added to a fixed input in the short run, beyond some point, marginal product decreases.
As one input increases while the other inputs are held fixed, output increases at a decreasing rate.
total-product curve
A curve showing the relationship between the quantity of labor and the quantity of output produced, ceteris paribus
fixed cost (FC)
Cost that does not vary with the quantity produced ex: rental of facilities
variable cost (VC)
Cost that varies with the quantity produced
ex: labor
short-run total cost (TC)
The total cost of production when at least one input is fixed; equal to FC + VC
average fixed cost (AFC)
The total fixed cost divided by the quantity produced (output)
average variable cost (AVC)
The total variable cost divided by the quantity produced (output)
when labor is the only variable input and w = wage

AVC = w(1 / APL)
average total cost (ATC)
Short-run total cost divided by the quantity produced
the ATC curve is initially negatively sloped because...
- spreading the fixed cost
- labor specialization
short-run marginal cost
The change in short-run total cost resulting from a one-unit increase in output (∆TC/ ∆Q)
long-run total cost (LTC)
The total cost of production when a firm is perfectly flexible in choosing its inputs
long-run average cost (LAC)
The long-run cost divided by the quantity produced
short run
Period of time in which the firm has both fixed and variable inputs. Fixed inputs cannot be adjusted in the short run while variable inputs can be changed. It is assumed in the short run that firms cannot change their1) capacity (maximum output)2) technology3) they are not able to enter and exit a market
long run
A period of time in which firms can adjust all inputs (so all inputs are variable). Firms can change their1) capacity
2) adopt new technology
3) can enter and exit markets
production technology
The means for combining inputs in a certain way in order to produce output. Production technology is defined mathematically by a production function that describes the relationship between inputs and outputs.
Q = f(variable inputs (including L) | fixed inputs)
average product (AP)
Average product shoes labor (input) productivity; it is equal to total output (Q) divided by total inputs (L) used in production.
AP = Q / L
3 stages of production
stage 1) MPL increases- workers become more productive by specializing
stage 2) MPL decreases- Law of Diminishing Returns, workers are less productive even though output is still increasingstage 3) MPL < 0- total output actually declines
total fixed costs (TFC)
Costs associated with short run fixed inputs that must be paid even if the amount of output produced equals zero. TFC do not vary with output levels.
ex: insurance, rent, taxes, an interest on operating capital
total variable costs (TVC)
Costs that change with different levels of output, as more variable inputs must be used to produce more output
ex: ingredients, workers
total costs (TC)
Total production costs

marginal cost (MC)
Change in cost (increase or decrease) associated with producing one more or less unit of output
MC = ∆TC / ∆Q
or MC = w(1/ MPL)
changes in variable costs
1) changes in input prices2) changes in productivity
changes in productivity
An increase in productivity means that more output can be produced with the same amount of input
perfectly competitive market characteristics
1) Many producers and consumers
2) Homogeneous products
3) Producers and consumers are price-takers
4) Free entry and exit to markets
perfect competition
In the long run, the competitive market equilibrium will result in economic efficiency, where MB = MC and the average cost of production is minimized.
short run profit-maximizing decision model
To determine how much a producer will produce and sell, ask:1) Will a firm produce?2) How much will be produced?
3) Will profits or losses be earned?
In a perfectly competitive market, why does marginal benefit equal price?
MB (or MR) = ∆TR / ∆Q = ∆(PQ) / ∆Q = P(∆Q) / ∆Q = P; MB = P
MB vs. MC
Production will continue as long as MB > MC
The profit maximizing quantity is where MB = MC
calculating profit
πE = TR - TCorπE = (P - ATC)Q
short run profit-maximizing decision modelproduce?
If P > min AVC - YES
If P < min AVC - NO
short run profit-maximizing decision modelhow much?
Choose Q where P = MC
short run profit-maximizing decision modelprofit, loss, or break-even?
πE = (P - ATC) Q
perfectly competitive firm's supply curve
The supply curve for a perfectly competitive firm is the portion of the marginal cost curve above minimum AVC. Supply curve equals MC > AVC
long run analysis assumptions
1) Firm exit and entry are the only adjustments firms can make in response to market conditions2) All firms are assumed to have identical cost structures, technology, and production capacity3) Firms are operating in a constant cost industry - entry/ exit will not affect input prices and production costs
transition from short run to long run
a) Start at breakeven where the market price equals minimum ATCb) Analyze a short run shock to market demand
c) Use the SR decision model to find the bakery output (Q) at the new market price and determine SR profits/ lossesd) Profits attract entry and losses cause exite) After all adjustments have been made, the long run market equilibrium / efficiency model will be: P = MC = min ATC
long run market equilibrium/ efficiency condition
P = MC = min ATC
opportunity cost
Opportunity costs are incurred when self-owned, self-employed resources are used in production
economic profit (πE)
πE = total revenue (TR) - explicit costs - opportunity costs
accounting profit (πA)
πA = total revenue (TR) - explicit costs
monopolies exist because of barriers to entry arising from:
1) Government action - patents and copyrights, public franchises2) Control of a key natural resource
3) Network externalities - product value increases with additional consumers
4) Natural monopoly due to large economies of scale (falling ATC over large range of output)

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