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long and short term firms
Principles of Micro-Econ 11th edition (text) by case, fair, and oster
55
Economics
Undergraduate 3
11/02/2014

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Term
Firm
Definition
an organization that comes into being when a person or a group of people decides to produce a good or service to meet a percived demand
Term
Total revenue
Definition
the amount received from the sale of the produce (q x P)
Term
Total Cost
Definition
the total of (1) out-of-pcket costs and (2) opportunity cost of all factors of production
Term
profit
Definition
the difference between total revenue and total cost
Term
economic profit
Definition
profit that accounts for both explict costs and opportunity costs
Term
normal rate of return
Definition
a rate of return on capital that is just sifficient to keep owners and investors satisfied. for relatively risk-free firms, it should be nearly the same as the interest rate on risk-free government bonds
Term
Short run
Definition
The period of time for which two conditions hold: the firm is operating under a fixed scale (fixed factor) of production, and firms can neither enter nor exit an industry.
Term
Long Run
Definition
That period of time for which there are not fixed factors of production: Firms can increase or decrease the scale of operation, and new firms can enter and/or existing firms can exit the industry
Term
optimal method of production
Definition
the production method that minimizes cost for a given level of output
Term
production technology
Definition
the quantitative relationship between inputs and outputs
Term
Labor-intensive technology
Definition
technology that relies heavily on human labor instead of capital
Term
Capital-intensive technology
Definition
technology that relies heavily on capital instead of human labor
Term
marginal product
Definition
the additional output that can be produced by adding one more unit of a specific input, ceteris paribus
Term
Law of diminishing demand
Definition
when additional units of a variable input are added to fixed inputs, after a certain point, the marginal product of the variable input declines
Term
average product
Definition
the average amount produced by each unit of a variable factor of production
Term
profit (equation)
Definition
total revenue - total cost
Term
average product of labor (equation)
Definition

total product 

_________________

total units of labor

Term
profit-maximizing firms in all industries must make three choices
Definition

1. how much output to supply

2. how to produce that output

3. how much of each input to demand

Term
to make decisions, firms need to know three things:
Definition

1. the market price of their output

2. the production techniques that are available

3. the prices of inputs

Term
fixed cost
Definition
Any cost that does not depend on the firms' level of output. These costs are incurred even if the firm is producing nothing. There are no fixed costs in the long run.
Term
variable cost
Definition
a cost that depends on the level of produciton chosen
Term
total cost (TC)
Definition
total fixed costs plus total variable costs
Term
total fixed costs (TFC) or overhead
Definition
the total of all costs that do not change with output even if output is zero
Term
average fixed cost (AFC)
Definition
total fixed cost divided by the number of units of output; a per-unit measure or fixed costs.
Term
Spreading overhead
Definition
The process of dividing total fived costs by more units of output. Average fixed cost declines as quantity rises.
Term
Total variable cost (TVC)
Definition
the total of all costs that vary with output in the short run
Term
Total variable cost curve
Definition
A graph that shows the relationship between total variable cost and the level of a firm's output
Term
At any given level of output, total variable cost depends on:
Definition

1. the techniques of production that are available

2. the prices of the inputs required by each technology

Term
Marginal cost (MC)
Definition
the increase in total cost that results from producing 1 more unit of output. Marginal costs reflect changes in variable costs
Term
Average variable costs (AVC)
Definition

total variable costs divided by the number of units or output

TVC

q

Term
Average total cost (ATC)
Definition

total cost divided by the number of units of output

TC

q

Term
perfect competition
Definition
an industry structure in which there are many firms, each small relative to teh industry, producing identical products and in which no firm is large enough to have any control over prices. In perfectly competitive industries, new competitors can freely enter the market and old firms can exit.
Term
homogeneous products
Definition
undifferentiated products; products that are identical to, or indistinguishable from, one another
Term
total revenue (TR)
Definition
The total amount that a firm takes in from the sale of its product: the price perunit times the quantity of output th firm decides to produce ( P x q)
Term
Marginal revenue (MR)
Definition
the additional revenue that a firm takes in when it inceases output by one additional unit. In perfect competition, P = MR
Term
Breaking even
Definition
the situation in which a firm is earning exactly a normal rate of return
Term
When the price falls below average variable cost, then the firm is better off...
Definition
Shutting down
Term
shutdown point
Definition
the lowest point on the average variable cost curve. when price falls below the minimum point on AVC, total revenue is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
Term
Short-run industry (market) supply curve
Definition
the sum of the marginal cost curves (above AVC) of all the firms in an industry.
Term
increasing returns to scale, or economies of scale
Definition
an increase on a firm's scale of production leads to lower costs per unit produced
Term
constant returns to scale
Definition
an increase in a firm's scale of production has no effect on costs per unit produced
Term
decreasing returns to scale, or diseconomies of scale
Definition
an increase on a firm's scale of production leads to higher costs per unit produced.
Term
long-run average cost curve (LRAC)
Definition
the "envelope" of a series pf short-run cost curves.
Term
minimum efficient scale (MES)
Definition
the smallest size at which long-run average cost is at its minimum
Term
optimal scale of plant
Definition
the scale of plant that minimized long-run average costs.
Term
long-run competitive equilibrium
Definition
when P = SRMC = SRAC = LRAC and profits are zero
Term
Partial equilibrium analysis
Definition
the process of examining the equalibrium conditions in individual markets and for households and firms separately
Term
general equilibrium
Definition
the conditional that exists when all markets in an economy are in simultaneous equilibrium
Term
efficiency
Definition
the condition in which the economy is producing what people want at the least possible cost
Term
Pareto efficiency or pareto optimality
Definition
a condition in which no change is possible that will make some members of society better off without making some other members of society worse off
Term
market failure
Definition
occurs when resources are misallocated or allocated inefficiently. the result is waste or lost surplus
Term
public goods, or social goods
Definition
Goods and services that bestow collective benefits on memebers of society. Generally, no one can be excluded from enjoying their benefits. the classic example is national defense
Term
externality
Definition
A cost or benefit imposed or bestowed on an individual or a group that is outside, or external to, the transaction
Term
imperfect information
Definition
teh absence of full knowledge concerning product characteristics, available prices, and so on
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