Unit 3 AP Economics Vacab
Terms in this set (96)
What is the Primary goal of most firms?
Maximizing their Profit
What is the equation of PROFIT?
Total Revenue - Total Cost
Is a cost that involves actually laying out money. Example: the tuition of going to College
Does not require an outlay of money, it is measured by the value, in dollar terms, of benefits that are forgone. Example: money you could of made
Of a business in the business's total revenue minus the explicit cost and depreciation, is the number you reported when paying your taxes.
of a business in the business's total revenue minus the opportunity cost of it resources.
A Business can face an implicit cost for two reasons, what are the reasons.
1) the business's capital could have been put to use in some other way
2) The owner devotes time and energy to the business that could have been used elsewhere
Implicit Cost of Capital
Is the opportunity cost of the capital used by the business, it reflects the income that could have been earned if the capital had been used in its next best alternative way
A Positive Economic Profit?
Indicates that the current use is the best use of resources
A Negative Economic Profit?
Indicates that there is a better alternative use for the resources
A economic Profit equal to Zero?
Know as a Normal Profit, an economic profit just high enough to keep a firm engaged in its current activity. Its good.
Market price X by the quantity of output, TR=P x Q
is the change in total revenue generated an additional unit of output, change in total revenue / change in quantity
Principle of Marginal Analysis
Every activity should continue unit marginal benefit equal marginal cost
Optimal Output Rule
says that profit is maximized by producing the quantity of output which the marginal is equal to its marginal cost, MR=MC
The Marginal Cost Curve
shows how the cost of producing one more unit depends on the quantity that has already been produced
Marginal Revenue Curve
Shows how marginal revenue varies as output varies
A firm decision on to produce or not, to stay in business or to close down permanently, should be based on?
The Economic Profit
A firm earns a normal profit when its?
Total revenue equals to total costs
comparing accounting profit to economic profit?
Accounting Profit can only be greater than economic profit
Which of the following is an Implicit cost of attending college?
which of the following is an example of an implicit cost of going to out for lunch?
the value of the time you spent eating lunch
Which of the following is the best definition of accounting Profit? Accounting profit equals total revenue minus depreciation and total
Which of the following is considered when calculating economic profit but not accounting profit
Is the relationship between the quantity of inputs a firm uses and the quantity of output it produces
A Variable Input
Is an input whose quantity the firm can very at any time
Is the time period in which all inputs can be varied
Is the time period in which at least one input is fixed
Total Product Curve
Shows how the quantity of output depends on the quantity of the variable input, for a given qunatitiy of a fixed input
Of an input is the additional quantity of output produced by using one more unit of that input
Marginal Product of labor is equal to?
Change in quantity of output produced by one additional unit of labor = change in quantity of output Divided by the change in quantity of labor
Marginal Production of labor Curve
Diminishing returns of labor
Diminishing return to an Input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leeds to a decline in marginal product of that input.
A production function shows the relationship between inputs and
Which of the following defines the short run?
When at least one input is fixed
The slope of the total product curve is also know as
Diminishing returns to an input ensures that as a firm continued to produce, the total product curve will have what kind of slope?
Is a cost that does not depend on the quantity of output produced, it is the cost of the fixed cost (FC)
is a cost that depends on the quantity of output produced.It is the cost on the fixed input (VC)
Of producing a given quantity of output is the sum of the fixed cost and the variable cost of producing that quantity of output. (TC)
What is the equation to find the TOTAL COST
Fixed cost + Variable Cost
Total Cost curve
Shows how total cost depends on the quantity of output
Total Product curve gets
Total Cost curve gets
Average total cost
often referred to simply as average cost, is total cost divided by quantity of output produced. (ATC)
What is the equation of AVERAGE TOTAL COST
Total Cost divide by quantity of output
you shed average total cost Curve
Falls at low levels of output and then rises at higher levels
Average fixed Cost
Is the fixed cost per unit of output
Average Variable cost
Is the variable cost per unit of output
Average fixed cost equation
Fixed cost divided by quantity (AFC)
Average variable Cost equation
Variable cost divide by quantity (AVC)
Look at the picture
Minimum Cost Output
is the quantity of output at which average total cost is lowest, it corresponds to the bottom of the U shape average total cost Curve
Long Run average Total Cost Curve
Shows the relationship between output and average total cost when fixed cost had been chosen to minimize average total cost of each level of output
Economies of scale
When long run average total cost declines as output increases
Increasing return to scale
When output increases more than in proportion to an increases in all inputs. For example, with increasing returns to scale, doubling all inputs would cause output to more than double
Diseconomies of scales
When longer run average total cost increase as output increases
Decreasing returns of scale
When output increase less than in proportion to an increase in all inputs
Constant Returns to Scale
When output increase directly in proportion to an increase in all inputs
Is a cost that has already been incurred and is nonrecoverable . A sunk cost should be ignored in a decision about future actions.
In the long run?
All inputs are Variables
When making decisions, which of the following costs should be ignored
Price Taking Firm
Is a firm whose actions have no effect on the market price of the good or service it sells
Price taking consumer
Is a consumer whose action has no effect on the market price of the good or service he or she buys
Perfectly Completive Market
Is a market in which all market participants are price takers
Perfect competitive industry
Is an industry in which firms are price takers
is the fraction of the total industry output accounted for by that firms output
A good is STANDARDIZED PRODUCT
Also known as a commodity, when consumers regard the products of different firms as the same good
An industry has FREE ENTREY AND EXIT
When new firms can easily enter into the industry and existing firms can easily leave the industry
Is when only producer of a good that has no close substitutes. An industry controlled by a monopolist is know as a MONOPOLY.
To Earn Economic profits, a monopolist must be protected by a BARRIER TO ENTRY
Something that prevents other firms from entering the industry
A NATURAL MONOPOLY
Exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry output
Gives an inventor a temporary monopoly in use or sale of an invention
Gives the creator of a literary or artistic work the sole right to profit from that work
Is an industry with only a small number of firms. A producer in such an industry is know as an Oligopolist
When no one firm has a monopoly, but producers nonetheless realize that they can affect market price
Measure the percentage of industry sales accounted for by the X larger firm, for example the four firm concentration ratio or the eight firm concatenation ratio.
Or HHI, is the square of each firms share of market sales summed over the industry. It gives a picture of the industry market structure, Example: HHI = 60 squared + 25 squared + 7 squared
Is a market structure in which there are many competing firms in an industry, each firm sells a differentaitianted product, and there is free entry into and exit from the industry in the long run
The Price taking firms optimal output rule
Says that a price taking firms profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced
If the firm produces quantity at which TR > TC
The firm is PROFITABLE
If the firm produces a quantity at which TR = TC
The firm BREAK EVEN
If the firm produces a quantity at which TR < TC
The firm INCURS a LOSS
The Break Even Price
of a price taking firm is the market price at which it earns Zero Profit
Whenever the market price exceeds the minimum average cost?
The Producer is PROFITABLE
Whenever the market price equals the minimum average total cost?
The Producer BREAKS EVEN
Whenever the market price is less than the minimum average cost?
The Producer is UNPROFITABLE
A firm will cease production in the short run if the market price falls below the?
SHUT DOWN PRICE, which is equal to minimum average variable cost
The SHORT RUN INDIVIDUAL SUPPLY CURVE
Shows how an individual firms profit maximizing level of output depends on the market price, taking fixed cost as given.
P > minimum ATC
Firm profitable. Entry into the industry in the long run
P = minimum ATC
Firm break even. no entry into or exit from industry in the long run
P < minimum ATC
Firm unprofitable. Exit from industry in the long run
Industry supply Curve
show the relationship between the price of a good and the total of the industry as a whole
Short run industry supply Curve
Shows how quantity supplied by an industry depends on the market price, give a fixed number of firms,
Short run market equilibrium
When the quantity supplied equals the quantity demanded, taking the number of producers as given