ECON 111 > Module 5 > Flashcards

Module 5 Flashcards

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1
Q

accounting profit

A

the total revenue minus explicit costs, including depreciation.

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2
Q

average profit

A

the total revenues, net costs, divided by the quantity of output produced. It is the profit per unit produced. It is also known as the profit margin per unit.

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3
Q

average total cost

A

the total cost (variable plus fixed) divided by the quantity of output.

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4
Q

average variable cost

A

variable cost divided by the quantity produced. Variable costs increase with the quantity produced.

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5
Q

constant returns to scale

A

implies that all inputs proportionately does not change the average cost of production.

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6
Q

diminishing marginal productivity

A

as a firm employs more labour, eventually the amount of additional output produced declines.

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7
Q

diseconomies of scale

A

occurs when the long-running average cost of producing outputs increases as total output increases. Also occurs when average costs rise when we increase production.

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8
Q

economic profit

A

occurs when the total revenues minus total costs are positive.

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9
Q

economies of scale

A

occur in the long-run when average costs of producing output decreases as total output increases. Can also occur when average total costs fall when production is increased.

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10
Q

explicit costs

A

out of pocket costs for a firm.

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11
Q

factor of production

A

resources that firms use to produce their products.

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12
Q

firm

A

an organisation that combines inputs of labour, capital, land, and raw or finished component materials to produce outputs.

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13
Q

fixed cost

A

the implicit and explicit costs associated with the fixed inputs.

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14
Q

fixed inputs

A

factors of production that cannot be easily increased or decreased in a short period of time.

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15
Q

implicit costs

A

the opportunity cost of resources already owned by the firm and used in business.

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16
Q

long run

A

a period of time during which all of a firms’ inputs are variable.

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17
Q

long run average cost curve

A

shows the lowest possible average cost of production, allowing for all the inputs of production to vary so that the firm is choosing its production technology.

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18
Q

marginal cost

A

the additional total cost of producing one more unit of output.

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19
Q

marginal product

A

the marginal product of labour is the change in a firm’s output when it employs more capital.

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20
Q

private enterprise

A

the ownership of businesses by private individuals.

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21
Q

production

A

the process of combining inputs to produce outputs.

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22
Q

production function

A

a mathematical relationship that tells us how much output a firm can produce with given amount of inputs.

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23
Q

production technologies

A

alternative methods of combining inputs to produce outputs

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24
Q

revenue

A

the income from selling a firm’s product. It is defined as price times quantity sold. Net revenue refers to revenue minus costs.

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25
short run
a period of time during which at least one or more of the firm's inputs are fixed.
26
short run average cost curve
shows average total cost in the short run. It is the sum of the average fixed costs and the average variable costs.
27
total cost
the sum of fixed and variable costs of production It includes all the explicit and implicit costs.
28
total product
a firm's output
29
variable cost
the cost of production that increases with the quantity produced. It is the cost of variable inputs.
30
variable inputs
factors of production that a firm can easily increase or decrease in a short period of time.
31
break even point
where total revenue equals total costs. It occurs where the marginal cost curve intersects the average total cost curve at the minimum point of AC. The price at this point ensures the firm is earning zero economic profits.
32
entry
the long run process of firms entering an industry in response to the existence of industry profits.
33
exit
the long run process of firms reducing production and shutting down in response to industry losses.
34
long run equilibrium
occurs when all firms earn zero economic profits producing the output level where P = AC despite doing the best they can.
35
marginal revenue
the additional revenue gained from selling one more unit of output
36
market structure
describes the conditions in an industry, such as the number of sellers, how east it is for new firms to enter, and the type of products that are sold.
37
perfect competition
each firm faces many competitors that sell identical products so that each firm is a price taker.
38
price taker
a firm in a perfect competitive market that must take the prevailing market price as given.
39
shutdown point
a level of output where the firm is making zero profits on its variable inputs. It occurs where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC. If the firm is below this point, the firm should shutdown immediately. SHUTDOWN IS NOT THE SAME AS EXIT. ex) retail stores shutdown at night
40
what are the four criteria for perfect competition?
1. many firms produce identical products 2. many buyers and sellers are available 3. sellers and buyers have all relevant information to make rational decisions 4. firms can enter and leave the market without any restrictions
41
what is the major decision of a perfectly competitive firm?
what quantity to produce
42
where does maximum profit occur?
at the quantity where the difference between total revenue and total cost is largest.
43
what does TR look like for a perfectly competitive firm?
a straight line sloping up; the slope is equal to the price of the good
44
what does TC look like for a perfectly competitive firm?
slopes up with some curvature
45
where does max profit occur for a perfectly competitive firm?
at the quantity where the difference between total revenue and total cost is largest.
46
why is the marginal revenue curve a horizontal like for a perfectly competitive firm?
because it is equal to the price of the good
47
when is the MC curve downward sloping for a perfectly competitive firm?
sometimes initially downward sloping if there is a region of increasing marginal returns at low levels of output
48
when is the MC curve upward sloping for a perfectly competitive firm?
eventually upward sloping at higher levels of output as diminishing marginal returns kick in
49
if P > AC the firm will
enter because economic profits are earned
50
if P = MC firms will
not enter or exit because economic profits are zero
51
if P < AC firms will
exit because economic losses are incurred
52
In Sam's greenhouse operation, labour is the only short-term variable input. After completing a cost analysis, if the marginal product of labor is the same for each unit of labor, this will imply that ( )
the average product of labour is always equal to the marginal product of labour
53
a firm earns ( ) profits where the average cost curve intersects the marginal cost curve
zero economic
54
for a perfectly competitive firm, the marginal cost curve is identical to the firm's ( )
supply curve
55
a company that has to accept the price that a perfectly competitive market offers for its product is refereed to as a ( )
price taker
56
the term "exit price" refers to a point where the ( )
the price the firm receives for their goods is equal to average cost
57
As the market expands, both old and new firms experience increases in their average costs of production, which makes the new zero-profit level intersect at a higher price than before. This is an example of an ( )
increasing cost industry
58
when a business adopts a strategy of reducing and/or discontinuing production is response to a sustained pattern of losses, it is
preparing to exit operations
59
what can be though of as an adjustment for the risks involved with respect to the cost of a firm acquiring financial capital?
imposition of hurdle rates of interest
60
( ) means producing without waste, so that the choice is on the production possibilities frontier
productive efficiency
61
suppose that the demand increases in a competitive market and the market price goes up. How would firms react?
they will increase production to where price equals marginal revenue and marginal cost
62
the maximum profit that a firm in a perfectly competitive market will occur at the quantity where the difference between ( ) and ( ) is largest
total revenue; total cost
63
what are four different competitive situations?
1. perfect competition: many firms all trying to sell identical products. 2. monopoly: only one firm is selling the product, and this firm faces no competition. 3. monopolistic competition: many firms selling similar but not identical products. 4. few firms that sell identical or similar products.
64
examples of factors of production
- natural resources - labour - capital - technology - entrepreneurship
65
examples of factor payments
- raw material prices - rent - wages and salaries - interest and dividends - profit
66
if market price > average cost profit is ( )
positive
67
if market price if < average cost, profit is ( )
negative
68
what are three implications of the LRAC curve?
1. how many firms will compete in the industry 2. whether the firms in an industry have many different sizes. 3. or if they will tend to be the same size
69
the term "constant returns to scale" describes a situation where ( )
expanding all inputs does not change the average cost of production
70
Jason wants to know if his lawnmowing business would be profitable. Given the market price, what does he need to determine his profit?
average costs
71
Jacob just started a bakery. He is trying to distinguish what his explicit costs are. What cost can he ignore?
his time
72
what is an example of a short-run cost?
hourly wage
73
the production function shows the relationship between ( )
inputs and a certain amount of output
74
( ) include all spending on labour, machinery, tools, and supplies purchased from other firms.
total costs
75
what is the term used to describe the situation when expanding all inputs does not affect the average cost of production?
constant returns to scale
76
the incremental change in a firm's output as a result of one additional increase in capital is called the ( )
marginal product of capital
77
what is the difference between fixed, variable, explicit, and implicit costs?
fixed: stay the same regardless of production variable: change with production levels explicit: direct out-of-pocket expenses implicit: opportunity costs
ECON 111
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