Production, Costs, and the Perfect Competition Model

question

diminishing returns

answer

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

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variable costs

answer

costs that change as output changes

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long run

answer

the time period in which all inputs can be varied

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short run

answer

the time period in which at least one input is fixed

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marginal product

answer

the additional output produced by one more unit of a variable input - often labor

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fixed costs

answer

a cost that must be paid even when a firm's output is zero; a cost that is the same at all output levels

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plant capacity

answer

the size of the factory, the amount of machinery and equipment, and other capital resources

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total product

answer

the total quantity of output produced by a certain amount of inputs

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average product

answer

the average quantity of output produced by one unit of a variable input, often labor

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marginal cost

answer

the additional cost of producing one more unit of output

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average total cost

answer

the average per unit total cost of production for a given quantity of output

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average fixed cost

answer

the average per unit fixed cost of production for a given quantity of output

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economies of scale

answer

long-run average total cost declines as output increases

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average variable cost

answer

the average per unit variable cost of production for a given quantity of output

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diseconomies of scale

answer

long-run ATC rises as the quantity of output increases

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accounting profit

answer

total revenue - explicit costs (profit after various costs and expenses are subtracted from total revenue or total sales)

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zero economic profit

answer

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

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economic profit

answer

a firm's revenues minus all its costs, implicit and explicit

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profit maximization

answer

A method of setting prices that occurs when marginal revenue equals marginal cost. (MR=MC)

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normal profit

answer

aka Zero Economic Profit, When a firm earns just enough revenue to pay for both explicit and implicit costs, occurs when the difference between a company's total revenue and combined explicit and implicit costs are equal to zero

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shut down rule

answer

total revenue must cover variable costs. If variable costs are greater than total revenue, business should shut down.

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barriers to entry

answer

Obstacles that prevent new competitors from entering a market. They benefit existing companies (Ex. patents, copyrights, brandy identity, government restrictions, start up costs)

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price taking

answer

The assumption that under perfect competition the firms have no ability to increase or decrease the price of their product from the market price.

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question

diminishing returns

answer

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

question

variable costs

answer

costs that change as output changes

question

long run

answer

the time period in which all inputs can be varied

question

short run

answer

the time period in which at least one input is fixed

question

marginal product

answer

the additional output produced by one more unit of a variable input - often labor

question

fixed costs

answer

a cost that must be paid even when a firm's output is zero; a cost that is the same at all output levels

question

plant capacity

answer

the size of the factory, the amount of machinery and equipment, and other capital resources

question

total product

answer

the total quantity of output produced by a certain amount of inputs

question

average product

answer

the average quantity of output produced by one unit of a variable input, often labor

question

marginal cost

answer

the additional cost of producing one more unit of output

question

average total cost

answer

the average per unit total cost of production for a given quantity of output

question

average fixed cost

answer

the average per unit fixed cost of production for a given quantity of output

question

economies of scale

answer

long-run average total cost declines as output increases

question

average variable cost

answer

the average per unit variable cost of production for a given quantity of output

question

diseconomies of scale

answer

long-run ATC rises as the quantity of output increases

question

accounting profit

answer

total revenue - explicit costs (profit after various costs and expenses are subtracted from total revenue or total sales)

question

zero economic profit

answer

A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.

question

economic profit

answer

a firm's revenues minus all its costs, implicit and explicit

question

profit maximization

answer

A method of setting prices that occurs when marginal revenue equals marginal cost. (MR=MC)

question

normal profit

answer

question

shut down rule

answer

total revenue must cover variable costs. If variable costs are greater than total revenue, business should shut down.

question

barriers to entry

answer

Obstacles that prevent new competitors from entering a market. They benefit existing companies (Ex. patents, copyrights, brandy identity, government restrictions, start up costs)

question

price taking

answer

The assumption that under perfect competition the firms have no ability to increase or decrease the price of their product from the market price.

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Production, Costs, and the Perfect Competition Model

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