ECON 323: Exam 2 - Custom Scholars
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# ECON 323: Exam 2

question
Production
Production transforms inputs into outputs.
-For instance, producing automobiles requires a variety of inputs (also called factors of production): raw materials (steel, plastic, rubber, and so on), factories, machines, land, and many different categories of workers.
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production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
-The firm's production function indicates the maximum level of output the firm can produce for any combination of inputs.
-Q=F(L,K)
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short run
the period of time during which at least one of a firm's inputs is fixed
-In the short run, one or more of the firm's inputs is fixed, that is, they cannot be varied.
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long run
the time period in which all inputs can be varied
-In the long run, the firm can vary all of its inputs.
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fixed inputs (fixed costs)
Factors of production that do not change with changes in the firm's level of output
Ex: rent, insurance
-Inputs that cannot be changed in the short run are called fixed inputs.
question
variable input
Any resource for which the quantity can change during the period of time under consideration
-labor is a variable input; that is, the firm can freely vary its number of workers.
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marginal product
the increase in output that arises from an additional unit of input
-This marginal product is the additional output produced by an additional unit of labor, all other inputs held constant.
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Marginal Revenue Product
the change in total revenue associated with one additional unit of input
-An input's marginal revenue product is the extra revenue that results from a unit increase in the input.
-MRPl= (MR)(MPl)
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Marginal cost of an input
The marginal cost of an input is simply the amount an additional unit of the input adds to the firm's total cost.
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Returns to scale
rate at which output increases as inputs are increased proportionately
-Returns to scale measure the percentage change in output resulting from a given percentage change in inputs.
question
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale occur if a given percentage change in all inputs results in an equal percentage change in output.
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increasing returns to scale
when long-run average total cost declines as output increases
-Increasing returns to scale occur if a given percentage increase in all inputs results in a greater percentage change in output.
question
decreasing returns to scale
when output increases less than in proportion to an increase in all inputs
-Decreasing returns to scale occur if a given percentage increase in all inputs results in a smaller percentage increase in output.
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Output elasticity
percentage change in output resulting from a 1% increase in all inputs
-Output elasticity is the percentage change in output resulting from a 1 percent increase in all inputs. For constant returns to scale, the output elasticity is 1; for increasing returns, it is greater than 1; and for decreasing returns, it is less than 1.
question
Isoquant
a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
-An isoquant is a curve that shows all possible combinations of inputs that can produce a given level of output.
question
Marginal Rate of Technical Substitution
the rate at which labor substitutes for capital without affecting output
-The marginal rate of technical substitution (MRTS) denotes the rate at which one input substitutes for the other and is defined as
question
linear production function
A production function that assumes a perfect linear relationship between all inputs and total output.
question
Production with fixed proportions
opposite extreme from linear production: fixed proportions allow no input in substitutions
-Production with fixed proportions is the opposite extreme from linear production; fixed-proportions production allows no input substitution.
question
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
-The opportunity cost associated with choosing a particular decision is measured by the benefits forgone in the next-best alternative.
question
accounting profit
total revenue minus total explicit cost
-Accounting profit is the difference between revenues obtained and expenses incurred.
question
economic profit
total revenue minus total cost, including both explicit and implicit costs
-Economic profit is the difference between revenues and all economic costs (explicit and implicit), including opportunity costs.
question
sunk cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
-A sunk cost is an expense that has already been incurred and cannot be recovered.
question
Cost Function
mathematical description of how a cost changes with changes in the level of an activity relating to that cost
-The cost function indicates the firm's total cost of producing any given level of output.
question
average total cost
total cost divided by the quantity of output produced
-Average total cost (or simply average cost) is total cost divided by the total quantity of output.
question
average variable cost
Variable Cost per Unit of output.
AVC = VC / Q
question
Constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale means that increasing all inputs by a given percentage (say, 20 percent) increases output by the same percentage.
question
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
-Production exhibits increasing returns to scale, or equivalently, economies of scale if average cost falls as the firm's scale of operation increases.
question
minimum efficient scale (MES)
output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale
-Minimum efficient scale (MES) is the lowest output at which minimum average cost can be achieved.
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shut down rule
a firm should shut down if the price falls below the minimum AVC
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Oligopoly
An oligopoly is a market dominated by a small number of firms, whose actions directly affect one another's profits, making the fates of oligopoly firms interdependent.
question
concentration ratio
the share of industry output in sales or employment accounted for by the top firms
-The four-firm concentration ratio, abbreviated by CR4, is the percentage of sales accounted for by the top four firms in a market or industry.
question
Effective Monopoly
An effective monopoly is said to exist when the single-firm concentration ratio is above 90 percent, CR1 > 90.
question
Effectively competitive
A market is effectively competitive when CR4 is below 40 percent.
question
loose oligopoly
an oligopoly in which the top four firms account for 50-75 percent of the industry's total sales
-one often speaks of a loose oligopoly when 40 percent < CR4 < 60 percent
question
tight oligopoly
An industry in which the top four firms account for 75 percent of the market sales
-a tight oligopoly when CR4 > 60 percent.
question
Prisoner's Dilemma
So frequent are situations (like the preceding example) in which individual and collective interests are in conflict that they commonly are referred to as the prisoner's dilemma.
question
strategic substitutes
Resources or capabilities that serve to neutralize a competitors previously effective barrier to imitation
-We say that the firms' actions are strategic substitutes when increasing one firm's action causes the other firm's optimal reaction to decrease.
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question
Production
Production transforms inputs into outputs.
-For instance, producing automobiles requires a variety of inputs (also called factors of production): raw materials (steel, plastic, rubber, and so on), factories, machines, land, and many different categories of workers.
question
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
-The firm's production function indicates the maximum level of output the firm can produce for any combination of inputs.
-Q=F(L,K)
question
short run
the period of time during which at least one of a firm's inputs is fixed
-In the short run, one or more of the firm's inputs is fixed, that is, they cannot be varied.
question
long run
the time period in which all inputs can be varied
-In the long run, the firm can vary all of its inputs.
question
fixed inputs (fixed costs)
Factors of production that do not change with changes in the firm's level of output
Ex: rent, insurance
-Inputs that cannot be changed in the short run are called fixed inputs.
question
variable input
Any resource for which the quantity can change during the period of time under consideration
-labor is a variable input; that is, the firm can freely vary its number of workers.
question
marginal product
the increase in output that arises from an additional unit of input
-This marginal product is the additional output produced by an additional unit of labor, all other inputs held constant.
question
Marginal Revenue Product
the change in total revenue associated with one additional unit of input
-An input's marginal revenue product is the extra revenue that results from a unit increase in the input.
-MRPl= (MR)(MPl)
question
Marginal cost of an input
The marginal cost of an input is simply the amount an additional unit of the input adds to the firm's total cost.
question
Returns to scale
rate at which output increases as inputs are increased proportionately
-Returns to scale measure the percentage change in output resulting from a given percentage change in inputs.
question
constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale occur if a given percentage change in all inputs results in an equal percentage change in output.
question
increasing returns to scale
when long-run average total cost declines as output increases
-Increasing returns to scale occur if a given percentage increase in all inputs results in a greater percentage change in output.
question
decreasing returns to scale
when output increases less than in proportion to an increase in all inputs
-Decreasing returns to scale occur if a given percentage increase in all inputs results in a smaller percentage increase in output.
question
Output elasticity
percentage change in output resulting from a 1% increase in all inputs
-Output elasticity is the percentage change in output resulting from a 1 percent increase in all inputs. For constant returns to scale, the output elasticity is 1; for increasing returns, it is greater than 1; and for decreasing returns, it is less than 1.
question
Isoquant
a curve that shows all the combinations of two inputs, such as capital and labor, that will produce the same level of output
-An isoquant is a curve that shows all possible combinations of inputs that can produce a given level of output.
question
Marginal Rate of Technical Substitution
the rate at which labor substitutes for capital without affecting output
-The marginal rate of technical substitution (MRTS) denotes the rate at which one input substitutes for the other and is defined as
question
linear production function
A production function that assumes a perfect linear relationship between all inputs and total output.
question
Production with fixed proportions
opposite extreme from linear production: fixed proportions allow no input in substitutions
-Production with fixed proportions is the opposite extreme from linear production; fixed-proportions production allows no input substitution.
question
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
-The opportunity cost associated with choosing a particular decision is measured by the benefits forgone in the next-best alternative.
question
accounting profit
total revenue minus total explicit cost
-Accounting profit is the difference between revenues obtained and expenses incurred.
question
economic profit
total revenue minus total cost, including both explicit and implicit costs
-Economic profit is the difference between revenues and all economic costs (explicit and implicit), including opportunity costs.
question
sunk cost
A cost that has already been incurred and that cannot be changed by any decision made now or in the future.
-A sunk cost is an expense that has already been incurred and cannot be recovered.
question
Cost Function
mathematical description of how a cost changes with changes in the level of an activity relating to that cost
-The cost function indicates the firm's total cost of producing any given level of output.
question
average total cost
total cost divided by the quantity of output produced
-Average total cost (or simply average cost) is total cost divided by the total quantity of output.
question
average variable cost
Variable Cost per Unit of output.
AVC = VC / Q
question
Constant returns to scale
the property whereby long-run average total cost stays the same as the quantity of output changes
-Constant returns to scale means that increasing all inputs by a given percentage (say, 20 percent) increases output by the same percentage.
question
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
-Production exhibits increasing returns to scale, or equivalently, economies of scale if average cost falls as the firm's scale of operation increases.
question
minimum efficient scale (MES)
output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale
-Minimum efficient scale (MES) is the lowest output at which minimum average cost can be achieved.
question
shut down rule
a firm should shut down if the price falls below the minimum AVC
question
Oligopoly
An oligopoly is a market dominated by a small number of firms, whose actions directly affect one another's profits, making the fates of oligopoly firms interdependent.
question
concentration ratio
the share of industry output in sales or employment accounted for by the top firms
-The four-firm concentration ratio, abbreviated by CR4, is the percentage of sales accounted for by the top four firms in a market or industry.
question
Effective Monopoly
An effective monopoly is said to exist when the single-firm concentration ratio is above 90 percent, CR1 > 90.
question
Effectively competitive
A market is effectively competitive when CR4 is below 40 percent.
question
loose oligopoly
an oligopoly in which the top four firms account for 50-75 percent of the industry's total sales
-one often speaks of a loose oligopoly when 40 percent < CR4 < 60 percent
question
tight oligopoly
An industry in which the top four firms account for 75 percent of the market sales
-a tight oligopoly when CR4 > 60 percent.
question
Prisoner's Dilemma
So frequent are situations (like the preceding example) in which individual and collective interests are in conflict that they commonly are referred to as the prisoner's dilemma.
question
strategic substitutes
Resources or capabilities that serve to neutralize a competitors previously effective barrier to imitation
-We say that the firms' actions are strategic substitutes when increasing one firm's action causes the other firm's optimal reaction to decrease.

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