Unit 3 Econ test

question

Law of Diminishing Marginal Returns

answer

As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall.

question

law of diminishing marginal utility

answer

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

question

total physical product

answer

the total output of goods or services produced

question

marginal product

answer

the additional output generated by adding inputs (workers) (change in TP/change in inputs)

question

average product

answer

output per unit of input (total product/units of labor)

question

Graphs

answer

stage 1: increasing marginal returns (marginal and total product are increasing at an increasing rate)

stage 2: decreasing marginal returns (marginal product is falling and total product is decreasing at a decreasing rate)

stage 3: negative marginal returns (marginal product is negative ann total product is decreasing)

question

Short run

answer

at least one input is fixed

question

Long run

answer

all inputs are variable

question

Average fixed cost

answer

fixed cost / quantity of output

question

fixed costs

answer

costs that remain constant as output changes

question

variable costs

answer

costs for variable resources that do change with the amount produced (ex: raw materials, labor)

question

average variable cost

answer

variable cost/quantity of output

question

total cost

answer

fixed costs plus variable costs

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

cost curves

answer

ATC (average total cost), AFC (average fixed costs), AVC (average variable costs), MC (marginal cost)

question

Why is the MC curve U-shaped?

answer

The MC curve falls and then rises because of diminishing marginal returns

question

Relationship between Production and Cost:

answer

as more workers are hired, their marginal product increases and then eventually decreases because of the law of marginal returns. The additional costs (MC) of the units they produce fall when MP goes up, but eventually increase as additional workers produce less and less output. MP and MC are mirror images of each other.

question

Why does ATC go down then up?

answer

when the MC is below the average, it pulls the average down but when the MC is above the average, it pulls the average up. MC intersects the ATC curve at ATC’s lowest point.

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises; can result from increasing returns to scale

question

increasing returns of scale

answer

when long-run average total cost declines as output increases

question

diseconomies of scale

answer

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

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

Profit

answer

total revenue minus total cost

question

accounting profit

answer

total revenue - explicit costs

question

economic profit

answer

total revenue - explicit costs - implicit costs (opportunity cost) Usually less than accounting profit due to taking into account opportunity cost (firm is experiencing a loss when economic profit is negative)

question

profit maximization

answer

MR=MC

question

TR>AVC

answer

firm stays open

question

TR<AVC

answer

firm shuts down

question

perfect competition charactersitics

answer

Many small firms

Low barrier entry

Identical products

Price takers- have to take the price set by the market

question

Why a perfect competitor is a price taker?

answer

Each individual firm takes the price set by the market so the demand for the firm is perfectly elastic... Means that it is MR-D-AR-P

Perfectly Competitive firms are price takers because they have no control over the market price; A perfectly competitive firm is known as a price taker because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors.

question

allocative efficiency

answer

the firm producing the amount society wants, where the price equals marginal cost (there is no DWL)

question

productive efficiency

answer

the firm is producing at the lowest possible cost, where the ATC is minimized; the quantity they are making is at the lowest point of the ATC curve

question

Constant Cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

Increasing Cost Industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

decreasing cost industry

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

1 of 37

question

Law of Diminishing Marginal Returns

answer

As variable resources (workers) are added to fixed resources (machinery, tool, etc.), the additional output produced from each new worker will eventually fall.

question

law of diminishing marginal utility

answer

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

question

total physical product

answer

the total output of goods or services produced

question

marginal product

answer

the additional output generated by adding inputs (workers) (change in TP/change in inputs)

question

average product

answer

output per unit of input (total product/units of labor)

question

Graphs

answer

stage 1: increasing marginal returns (marginal and total product are increasing at an increasing rate)

stage 2: decreasing marginal returns (marginal product is falling and total product is decreasing at a decreasing rate)

stage 3: negative marginal returns (marginal product is negative ann total product is decreasing)

question

Short run

answer

at least one input is fixed

question

Long run

answer

all inputs are variable

question

Average fixed cost

answer

fixed cost / quantity of output

question

fixed costs

answer

costs that remain constant as output changes

question

variable costs

answer

costs for variable resources that do change with the amount produced (ex: raw materials, labor)

question

average variable cost

answer

variable cost/quantity of output

question

total cost

answer

fixed costs plus variable costs

question

average total cost

answer

total cost divided by the quantity of output

question

marginal cost

answer

the cost of producing one more unit of a good

question

cost curves

answer

ATC (average total cost), AFC (average fixed costs), AVC (average variable costs), MC (marginal cost)

question

Why is the MC curve U-shaped?

answer

The MC curve falls and then rises because of diminishing marginal returns

question

Relationship between Production and Cost:

answer

question

Why does ATC go down then up?

answer

when the MC is below the average, it pulls the average down but when the MC is above the average, it pulls the average up. MC intersects the ATC curve at ATC’s lowest point.

question

economies of scale

answer

factors that cause a producer's average cost per unit to fall as output rises; can result from increasing returns to scale

question

increasing returns of scale

answer

when long-run average total cost declines as output increases

question

diseconomies of scale

answer

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

question

decreasing returns to scale

answer

when long-run average total cost increases as output increases

question

constant returns to scale

answer

the property whereby long-run average total cost stays the same as the quantity of output changes

question

Profit

answer

total revenue minus total cost

question

accounting profit

answer

total revenue - explicit costs

question

economic profit

answer

question

profit maximization

answer

MR=MC

question

TR>AVC

answer

firm stays open

question

TR<AVC

answer

firm shuts down

question

perfect competition charactersitics

answer

Many small firms

Low barrier entry

Identical products

Price takers- have to take the price set by the market

question

Why a perfect competitor is a price taker?

answer

Each individual firm takes the price set by the market so the demand for the firm is perfectly elastic... Means that it is MR-D-AR-P

question

allocative efficiency

answer

the firm producing the amount society wants, where the price equals marginal cost (there is no DWL)

question

productive efficiency

answer

the firm is producing at the lowest possible cost, where the ATC is minimized; the quantity they are making is at the lowest point of the ATC curve

question

Constant Cost industry

answer

an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal

question

Increasing Cost Industry

answer

an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward

question

decreasing cost industry

answer

An industry in which expansion through the entry of firms lowers the prices that firms in the industry must pay for resources and therefore decreases their production costs.

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Unit 3 Econ test

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