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43 Cards in this Set
- Front
- Back
Profit
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Total revenue minus total cost
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Business firm
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An organization owned and operated by private individuals, that specializes in production
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Production
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The process of combining inputs to make goods and services
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Technology
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The method to turn inputs into outputs (produce goods or services)
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Long run
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A time horizon long enough for a firm to vary all of its inputs
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Variable inputs
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An input whose usage can change as the level of output changes
(inputs that can vary) |
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Fixed input
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An input whose quantity must remain constant, regardless of how much output is produced
(inputs that remain fixed) |
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Short run
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A time horizon during which at least one of the firm's inputs cannot be varied
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Total product
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The maximum quantity of output that can be produced from a given combination of inputs
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Marginal product of labor(MPL)
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The additional output produced when one more worker is hired
-MPL= Change in (Q)/ change in (L) Q=quantity L=labor |
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Increasing marginal returns to labor
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The marginal product of labor increases as more labor is hired
(output increases more dramatically each time) |
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Diminishing marginal returns to labor
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The marginal product of labor decreases as more labor is hired
(output continues to increase but less dramatic each time) |
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Law of diminishing (marginal) returns
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As more and more of any input is added to a fixed amount of other inputs, its marginal product will eventually decline
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Sunk cost
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A cost that has been paid or must be paid, regardless of any future action being considered
- Sunk costs should not be considered when making decisions |
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Explicit costs
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Involving actual payments
ex. Rent paid out, Interest on loans, managers' salaries, cost of raw materials |
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Implicit costs
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No money changes hands but still a loss
ex. opportunity cost of: rent foregone, investment income foregone |
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Fixed costs
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Costs of fixed inputs, which remain constant as output changes
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Variable costs
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Costs of variable inputs, which changes with output
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Total fixed cost(TFC)
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The cost of all inputs that are fixed in the short run
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Total variable cost(TVC)
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The cost of all variable inputs used in producing a particular level of output
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Total cost(TC)
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The costs of all inputs--fixed and variable
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Average fixed cost(AFC)
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Total fixed cost divided by the quantity of output produced:
AFC = TFC/Q |
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Average variable cost(AVC)
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Total variable cost divided by the quantity of output produced
AVC = TVC/Q |
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Average total cost(ATC)
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Total cost divided by the quantity of output produced
ATC = TC/Q |
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Marginal cost(MC)
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The increase in total cost from producing one more unit of output
MC = (change in TC)/(change in Q) |
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Shape of the marginal cost curve
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MC curve is U-shaped
- Marginal product of labor(MPL) rise, marginal cost(MC) falls - MPL falls, MC rises - MC fall then rises(Because MPL rises then falls) |
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Relationships between average and marginal costs
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the U-shape of the AVC curve results from the U-shape of the MC curve
the U-shape of the ATC curve results form the behavior of both AVC and AFC. Low levels of output=AVC and AFC falling, so ATC curve slopes downward. Higher levels of output=rising AVC overcomes falling AFC, and ATC curve slopes upward The MC curve crosses both the AVC curve and the ATC curve at their respective minimum points(where it changes to an upward slope) |
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Cost in the long run
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There are no fixed inputs or fixed costs; all inputs and all costs are variable
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Production in the long run
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A firm will choose the combination method with the lowest cost
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Long-run total cost(LRTC)
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The cost of producing each quantity of output when the least-cost input combination is chosen
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Long-run average total cost
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The cost per unit of producing each quantity of output in the long run, when all inputs are variable
LRATC = LRTC/Q It tells us the cost per unit when the firm can vary all of its inputs and always choose the cheapest input mix possible |
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Long-run total cost range
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can be less than or equal to , but not greater than, the short-run total cost (LRTC < or = TC)
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Long run average cost range
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Can be less than or equal to, but not greater than, the short-run average total cost
(LRATC < or = ATC) |
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Plant
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the collection of fixed inputs in the short run at the firm's disposal
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ATC and LRATC relationship
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in the short run, a firm can only move along it's current ATC curve. In the long run, it can move from ATC curve to another by varying the size of its plant. As it does so, it will also be moving along its LRATC curve
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The shape of LRATC
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- If long-run TC rises proportionately less than output, LRATC slopes downward(economies of scale)
- If cost rises proportionately more than output, LRATC slopes upward(diseconomies of scale) - Between those 2 regions, cost and output rise proportionately,, yielding constant returns to scale (LRATC is U- shaped. y-axis: cost. x-axis: output left = economies of scale right = diseconomies of scale middle = constant returns to scale) |
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Economies of scale
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Long-run average total cost decreases as output increases
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Lumpy input
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An input whose quantity cannot be increased gradually, but must instead be adjusted in large jumps.
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Diseconomies of scale
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Long-run average total cost increases as output increases (higher output levels)
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Constant returns to scale
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long-run average total cost is unchanged as output increases
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Isoquant
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Curve (Q) that show different input combination that can produce the same quantity of output
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Isoquant shape
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Always slopes downwards. An increase in one input requires a decrease in the other input to keep total production unchanged.
(Left half of a U) |
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Marginal rate of technical substitution(MRTS)
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The rate at which a firm can substitute one input for another while keeping output constant
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