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Econ 1b Exam 2
Terms in this set (47)
Average Total Cost
Average Fixed Cost
Total Fixed Cost/ Output
Average Variable Cost
Total Variable Cost/Output
Total Fixed Cost
Total Cost-Total Variable Cost
Total Variable Cost
Total Cost-Total Fixed Cost
Change in Total Cost/Change in Output
Change in Total Revenue/Change in output
Total Revenue - Total Cost
The difference between the firm's total revenues and its total costs, including both the explicit and implicit cost components.
Total Revenue - (Explicit Costs + Implicit Costs)
Sales Revenue- Expenses
Payments by a firm to purchase the services of productive resources.
opportunity costs associated with a firm's use of resources that it owns. These costs do not involve a direct money payment. examples include wage income and interest forgone by the owner of a firm who also provides labor services and equity capital to the firm.
Law of Diminishing Returns
As more units are added to fixed resources output will increase at a decreasing rate. Then large amounts of variable factors are need to expand output by one unit.
The total output of a good that is associated with each alternative utilization rate of a variable input.
change in output with each additional unit of labor.
Change in total product/units of labor
The sum of explicit and implicit Costs.
Total Fixed Cost + Total Variable Cost
economies of scale
reductions of per-unit costs associated with large plants to produce a large volume output
Constant Returns to Scale
Unit costs that are constant as the scale of the firm is altered. neither economics nor diseconomies of scale are present.
Costs that have already been incurred as a result of past decisions. They are sometimes referred to as historical costs.
the firms all produce identical products, and each seller is small relative to the total market. Thus, the output of any single firm has no effect on the market price. Each firm can sell all its output at the market price
it would not fall to zero. Firms like Nike are not price takers. They are price searchers: They choose the price that they will charge for their product, but the quantity that they are able to sell is very much related to that price
competition as a dynamic process
Rivalry or competitiveness between or among parties to deliver a better deal to buyers in terms of quality, price, and product information.
A market structure characterized by a large number of small firms producing an identical product in an industry (market area) that permits complete freedom of entry and exit1
barriers to entry
Obstacles that limit the freedom of potential rivals to enter and compete in an industry or market.
Fundamentals of Consumer Choice
1. Limited Income Necesitates Choice
2. Consumers make decisions purposefully whether it be more beneficial or cheaper
3. One good can be substituted for another; consumers can achieve utility from different goods
4. consumers will make decisions with little information but they will use past experiences to help them
5. the law of diminishing marginal utility applies
additional utility or satisfaction, derived from consuming additional units of goods
A person will try and maximize their utility as much as they can to get the most out of their moneyS
the maximum price a consumer is willing to pay for an additional unit of a product.
the height of an individual's demand curve is equal to the max price.
$ amount represents the opportunity cost forgone of other goods.
Consumers are willing to purchase goods AS LONG AS MB=Price
As the price of a good declines, consumers have a lower opportunity cost to buy more of it even though they have to sacrifice other goods.
The reduction of price of a good makes a consumer feel like they have more income
The market demand schedule is the relationship between the market price of a good and the amount demanded by all the individuals in the market area.
Price Elasticity of Demand
The price elasticity of demand indicates how responsive consumers are to a change in a product's price.
%Change in Qty Demanded/% Change in Price
Changes in total consumer spending on a product
1. changes in individual total spending
2.changes in total combined spending of all consumers
3.changes in total consumer spending on all products
%Change in Qty Demanded/%Change in Income
any good with a positive income elasticity of demand
a good with a negative income elasticity; as consumer income rises demand for that good declines
Price Elasticity of Supply
%Change in Qty Supply/%Change in Price
Organization of Business Firms
1. purchase productive resources from households and other firms
2. transform them into a different commodity
3. sell the transformed product or service to consumers
Individuals who personally receive the excess, if any, of revenues over costs. Residual claimants gain if the firm's costs are reduced or revenues increase.
A production process in which employees work together under the supervision of the owner or the owner's representative.
Working at less than the expected rate of productivity, which reduces output. Shirking is more likely when workers are not monitored, so that the cost of lower output falls on others.
The incentive problem that occurs when the purchaser of services (the principal) lacks full information about the circumstances faced by the seller (the agent) and cannot know how well the agent performs the purchased services.
A business owned by a single individual. The individual has full liability and takes full responsibility.
72% of firms in the US
4% of business revenues
Consists of 2 or more people; partners take risk on an agreed-upon manner.
10% of total firms
14% of business revenues
Owned by shareholders who posess ownership rights to the profits.
82% of business revenue
18% of all firms
opportunity cost of equity capital
The rate of return that must be earned by investors to induce them to supply financial capital to the firm.
Normal Profit Rate
Zero economic profit, providing just the competitive rate of return on the capital (and labor) of owners. An above-normal profit will draw more entry into the market, whereas a belownormal profit will lead to an exit of investors and capital.
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