Chapter 10

question

Firm

answer

an organization that hires factors of production and organizes them to produce and sell goods

question

Accounting Profit

answer

Total revenue - explicit costs - depreciation

question

Economic Profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Explicit costs

answer

The actual payment costs

question

Implicit costs

answer

opportunity costs

question

firm's opportunity cost of production

answer

the value of the best alternative use of the resources that a firm uses in production

question

implicit rental rate of capital

answer

the firm's opportunity cost of using the capital it owns

Made up of
- economic depreciation: change in market value
- interest forgone: return on the funds used to acquire the capital

question

Normal Profit

answer

the cost of entrepreneurship and is an opportunity cost of production

question

Questions for the firm's profit maximizing decisions

answer

1. What to produce and in what quantities
2. How to produce
3. How to organize and compensate its managers and workers?
4. How to market and price its products
5. What to produce itself and what to buy from other firms

question

Firm's Profit Constraints

answer

Technology constraints
- using the available technology, the firm can only produce more if it hires more, hiring more resources increases costs

Information constraints
- firms have limited information

Market constraints
- constrained by consumer's willingness to buy and competitor's prices
- constrained by the willingness of people to work and invest in the firm

question

technological efficiency

answer

occurs when the firm produces a given output by using the least amount of inputs

question

Economic efficiency

answer

The firm produces a given quantity of output at the least cost
- economic efficiency are also technological efficiency

question

command system

answer

Commands go down the hierarchy while information (feedback) goes upwards

Used when it is easy to monitor performance or when a small deviation from the ideal performance is very costly

question

Incentive systems

answer

Using rewards to induce workers to maximize firm's profits

Used when difficult to monitor performance or too costly to monitor

question

Short Run

answer

the period of time during which at least one of a firm's inputs is fixed

- Decisions can be easily reversed

question

Long Run

answer

the time period in which all inputs can be varied
- not easily reversed

question

Sunk cost

answer

a cost that has already been committed and cannot be recovered

- irrelevant to a firm's current decisions

question

Short-Run Technology Constraint

answer

to increase output in the short run, a firm must increase the amount of labor employed

question

Three concepts that describe the relationship between output and the quantity of labour employed

answer

1. Total product (TP)
- total output produced in a given period
2. Marginal Product (MP)
3. Average Product (AP)

question

Product Schedules: As the quantity of labour increases...

answer

TP increases, MP increases initially but then decreases, AP decreases

question

Product curves

answer

shows how the firm's TP, MP, and AP change as the firm varies the quantity of labor employed

question

total product curve

answer

A curve showing the relationship between the quantity of labor and the quantity of output produced

question

Marginal Product Curve

answer

- Increasing marginal returns initially, diminishing marginal returns eventually

question

Law of Diminishing Returns

answer

as a firm uses more of a variable factor of production with a fixed factor of production, the marginal product of the variable factor eventually diminishes

question

Average Product Curve

answer

When MP > AP, AP increases

When MP < AP, AP decreases

When MP = AP, AP is at its maximum

question

Short Run Cost

answer

To produce more output in the short run, the firm must employ more labor, which means that it must increase its costs

question

Where does TVC get its shape from?

answer

TP curve flipped

question

Marginal Cost (MC)

answer

the change in total costs associated with a one-unit change in output

- over the range of increasing marginal returns, MC falls

- over the range of diminishing marginal returns, MC rises

question

AVC and ATC is _______ shaped

answer

U-shaped

question

MC and AVC or ATC

answer

AVC falling = MC below

AVC rising = MC above

AVC minimum point is at AVC = MC

Replace AVC with ATC and it still applies

question

Marginal Product and Marginal Cost

answer

MP at maximum = MC at minimum

MP rising = MC falling

question

Average Product and Average Variable Cost

answer

AP at maximum = AVC at minimum

AP rising = AVC falling

question

Position of a firm's cost curves depends on two factors

answer

1. technology
2. prices of factors of production

question

Production Function

answer

the relationship between the maximum output attainable and the quantities of both labor and capital

question

Diminishing marginal product of capital

answer

tendency for the marginal product of capital to fall as capital per worker rises

question

Economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

Diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output

question

constant returns to scale

answer

the situation in which a firm's long-run average costs remain unchanged as it increases output

question

Minimum efficient scale

answer

The lowest rate of output at which the long run average cost reaches its lowest value

1 of 39

question

Firm

answer

an organization that hires factors of production and organizes them to produce and sell goods

question

Accounting Profit

answer

Total revenue - explicit costs - depreciation

question

Economic Profit

answer

total revenue minus total cost, including both explicit and implicit costs

question

Explicit costs

answer

The actual payment costs

question

Implicit costs

answer

opportunity costs

question

firm's opportunity cost of production

answer

the value of the best alternative use of the resources that a firm uses in production

question

implicit rental rate of capital

answer

the firm's opportunity cost of using the capital it owns

Made up of
- economic depreciation: change in market value
- interest forgone: return on the funds used to acquire the capital

question

Normal Profit

answer

the cost of entrepreneurship and is an opportunity cost of production

question

Questions for the firm's profit maximizing decisions

answer

question

Firm's Profit Constraints

answer

question

technological efficiency

answer

occurs when the firm produces a given output by using the least amount of inputs

question

Economic efficiency

answer

The firm produces a given quantity of output at the least cost
- economic efficiency are also technological efficiency

question

command system

answer

Commands go down the hierarchy while information (feedback) goes upwards

Used when it is easy to monitor performance or when a small deviation from the ideal performance is very costly

question

Incentive systems

answer

Using rewards to induce workers to maximize firm's profits

Used when difficult to monitor performance or too costly to monitor

question

Short Run

answer

the period of time during which at least one of a firm's inputs is fixed

- Decisions can be easily reversed

question

Long Run

answer

the time period in which all inputs can be varied
- not easily reversed

question

Sunk cost

answer

a cost that has already been committed and cannot be recovered

- irrelevant to a firm's current decisions

question

Short-Run Technology Constraint

answer

to increase output in the short run, a firm must increase the amount of labor employed

question

Three concepts that describe the relationship between output and the quantity of labour employed

answer

1. Total product (TP)
- total output produced in a given period
2. Marginal Product (MP)
3. Average Product (AP)

question

Product Schedules: As the quantity of labour increases...

answer

TP increases, MP increases initially but then decreases, AP decreases

question

Product curves

answer

shows how the firm's TP, MP, and AP change as the firm varies the quantity of labor employed

question

total product curve

answer

A curve showing the relationship between the quantity of labor and the quantity of output produced

question

Marginal Product Curve

answer

- Increasing marginal returns initially, diminishing marginal returns eventually

question

Law of Diminishing Returns

answer

as a firm uses more of a variable factor of production with a fixed factor of production, the marginal product of the variable factor eventually diminishes

question

Average Product Curve

answer

When MP > AP, AP increases

When MP < AP, AP decreases

When MP = AP, AP is at its maximum

question

Short Run Cost

answer

To produce more output in the short run, the firm must employ more labor, which means that it must increase its costs

question

Where does TVC get its shape from?

answer

TP curve flipped

question

Marginal Cost (MC)

answer

the change in total costs associated with a one-unit change in output

- over the range of increasing marginal returns, MC falls

- over the range of diminishing marginal returns, MC rises

question

AVC and ATC is _______ shaped

answer

U-shaped

question

MC and AVC or ATC

answer

AVC falling = MC below

AVC rising = MC above

AVC minimum point is at AVC = MC

Replace AVC with ATC and it still applies

question

Marginal Product and Marginal Cost

answer

MP at maximum = MC at minimum

MP rising = MC falling

question

Average Product and Average Variable Cost

answer

AP at maximum = AVC at minimum

AP rising = AVC falling

question

Position of a firm's cost curves depends on two factors

answer

1. technology
2. prices of factors of production

question

Production Function

answer

the relationship between the maximum output attainable and the quantities of both labor and capital

question

Diminishing marginal product of capital

answer

tendency for the marginal product of capital to fall as capital per worker rises

question

Economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises

question

Diseconomies of scale

answer

the situation in which a firm's long-run average costs rise as the firm increases output

question

constant returns to scale

answer

the situation in which a firm's long-run average costs remain unchanged as it increases output

question

Minimum efficient scale

answer

The lowest rate of output at which the long run average cost reaches its lowest value

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Chapter 10

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