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Test Two Colander Chapters 8-14
Test Two Colander Chapters 8-14 (maybe not everything...)
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Economics
10/30/2009

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Term
Firms
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
Term
virtual firm
Definition
a firm which subcontracts out all production
Term
Profit formula
Definition
Profit = Total Revenue - Total Cost
Term
accounting profit
Definition
explicit revenue - explicit costs
Term
economic profit
Definition
implicit and explicit revenue - implicit and explicit costs
Term
implicit revenues and costs
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
Term
transaction costs
Definition
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)
Term
Value Added
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%
Term
difference between the long run and the short run
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.
Term
production table
Definition
shows the output resulting form various combinations of factors of production or inputs
Term
marginal product
Definition
the additional output gained from an additional worker (input), all other inputs constant
Term
average product
Definition
output per worker (input). This is the total output divided by the number of workers (quantity of inputs)
Term
prodcuction function
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.
Term
Where are firms most likely to operate on a production funtion
Definition
the areas of diminishing marginal productivity and falling average product
Term
law of diminishing productivity
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
Term
Fixed Costs
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
Term
Variable Costs
Definition
Costs that change as output changes. As output increases variable costs also increase
Term
Total Cost
Definition
the sum of fixed and variable costs
Term
Average (Total) Cost
Definition
Total Cost divided by Quantity (TC/Q = ATC)
or
AFC+AVC = ATC
Term
Average Fixed Costs
Definition
fixed cost divided by quantity produced (FC/Q = AFC)
Term
Average Variable Costs
Definition
variable cost divided by quantity produced (VC/Q = AVC)
Term
Marginal Costs
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
Term
what happens to average fixed cost curve as output increases
Definition
the AFC curve falls because the same fixed costs can be spread over a wider range of output
Term
In the short run, how can you raise output?
Definition
by increasing the variable input(s). Watch out for the law of diminishing marginal returns.
Term
what happens when marginal and average productivities fall?
Definition
when marginal productivity falls, marginal costs must rise and when average productivity falls, average costs must rise. These two are not necessarily related
Term
Why are short-run costs curves U shaped
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
Term
If marginal cost is below the AVC and ATC curves, what is happening to these curves
Definition
these curves are falling. Even though MC is rising. These curves will rise when MC is above them.
Term
What about when MC is above the AVC and below the ATC
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
Term
Which curves are mirror images of each other?
Definition
The average variable cost curve and marginal cost curve are mirror images of the average product curve and the marginal product curve, respectively
Term
Formula for the relationship between MC and ATC
Definition
If MC>ATC, then ATC is rising if MC=ATC, than ATC is constant If MC
Term
perfectly competitive market
Definition
a market in which economic forces operate unimpeded
Term
What does the demand curve for individual firms in a perfectly competitive market look like?
Definition
it is completely horizontal (perfectly elastic
Term
marginal revenue
Definition
the change in total revenue associated with a change in quantity
Term
what determines what happens to profit in response to a change in output
Definition
Marginal revenue and marginal cost
Term
for a perfect competitor, what does Marginal Revenue equal
Definition
Price or market price (they are the same thing)
Term
The marginal revenue for a perfect competitor will be the same at all levels of output. True or False
Definition
True (as long as the demand curve is constant)
Term
what is always the same for a perfect competitor?
Definition
the marginal revenue and the demand curve the firm faces
Term
point of profit maximization
Definition
MR=MC
Term
When does it make sense to increase output?
Definition
It makes sense to increase output as long as the marginal cost is below the marginal revenue.
Term
The Marginal Cost Curve is also...?
Definition
the supply curve. But above the average variable cost curve
Term
does a firm want to increase total profit or profit per unit? Which would have a higher output?
Definition
A firm wants to maximize total profit. Total profit is at a higher output
Term
Where will total profit be highest?
Definition
at the profit maximizing level. To figure this out all you need is total revenue and total cost
Term
On a graph mapping Total Revenue and Total Cost, where is profit?
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
Term
Does the profit maximizing position maximize ATV, AVC or both?
Definition
It does not necessarily maximize either
Term
Why doesn't a firm shut down if is making a loss?
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.
Term
Where is the shutdown point?
Definition
the point at which price equals AVC
Term
market supply curve
Definition
the horizontal sum of all the firms' MC curves, taking into account any changes in input price that might occur
Term
The difference between the long run and the short run in regards to firms
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
Term
The long run market supply curve is perfectly elastic in constant cost industries. True or False
Definition
True
Term
constant cost industry
Definition
factor prices do not increase or decrease as output increases
Term
increasing cost industry
Definition
factor prices rise as more firms enter the market and existing firms expand production
Term
decreasing cost industry
Definition
factor prices fall as industry outpt expands
Term
in increasing cost industries what does the industry supply curve look like
Definition
it is upward sloping
Term
in decreasing cost industries what does the industry supply curve look like
Definition
it is downward sloping
Term
another difference between the short and long run
Definition
in thee short run, the price does more of the adjusting, in the long run, the quantity does more of the adjusting
Term
fixed costs
Definition
costs that do not change with the output level
Term
Monopolistic Competition
Definition
Many Sellers
Differentiated Products
Multiple dimensions of competition
Easy entry of new firms in the long run
Term
What does the monopolistic competitor's graph look like
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