Demand and Supply Analysis: the Firm Flashcards Preview

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Flashcards in Demand and Supply Analysis: the Firm Deck (28):

Calculate and interpret accounting profit

Net income on income statement (total revenue minus accounting costs)


Calculate and interpret economic profit

Accounting profit minus total implicit opportunity costs


Calculate and interpret normal profit

Normal profit is level of accounting profit that just covers implicit opportunity costs


Calculate and interpret economic rent

Surplus value resulting from fixed supply of particular good causing market price to be higher than cost to bring resource to market


Calculate and interpret total revenue

Price times quantity sold


Calculate and interpret average revenue

Total revenue divided by quantity sold


Calculate and interpret marginal revenue

Change in total revenue divided by change in quantity


Compare accounting, economic, normal profit, and economic rent

If accounting profit exceeds normal profit, market rewards firm. If just equals, no effect. If accounting profit less than normal profit, market punishes firm.


Compare total, average, and marginal revenue

Marginal revenue equals average revenue in competitive market


Describe a firm's factors of production

land, labor, capital, and materials


Calculate and interpret total costs

Total fixed costs plus total variable costs


Calculate and interpret average costs

Total cost divided by quantity - maximize profit at lowest point on average cost curve


Calculate and interpret marginal costs

Change in total cost divided by change in quantity sold - usually decline initially and increase at higher quantities


Calculate and interpret fixed costs

Sum of all fixed expenses (incl. opportunity costs), which do not change based on quantity


Calculate and interpret variable costs

Sum of all variable expenses (per unit variable cost times quantity) - increases when quantity increases


Calculate and interpret breakeven points of production

Quantity where price, average revenue, and marginal revenue equal average total cost - want lower b/c easier to achieve, but higher should result in greater profits


Calculate and interpret shutdown points of production

Quantity where average revenue less than average variable cost - requires shutting down and just paying fixed costs


Describe approaches to determining profit maximizing level of output

Maximize spread on TR and TC;
MR equals MC; or
Revenue value of output from last unit of input employed equals cost of employing that input unit


Describe how economies of scale and diseconomies of scale affect costs

As firm grows it can move to lower cost structure (economy of scale) or higher cost structure (diseconomy of scale)


Distinguish between short-run and long-run profit maximization

TR>TC - stay in market
MR=MC - maximum profit in short run


Distinguish among decreasing cost, constant cost, and increasing cost industries - describe long run supply of each

Constant is where output increases by same proportion as increase in inputs. Decreasing/increasing self descriptive.


Calculate and interpret total product of labor

Sum of all inputs during time period


Calculate and interpret marginal produt of labor

Amount of additional output resulting from one more unit of input (assuming other inputs fixed)

Change in total product/Change in Labor


Calculate and interpret average product of labor

Total product divided by quantity of given input


Describe diminishing marginal returns

Adding additional inputs leads to lower marginal products, eventually becoming negative (fixed resources like plant size or quality of labor affect this)


Calculate and interpret profit-maximizing utilization level of an input

Marginal Product times Price of Input


Determine optimal combination of resources that minimizes cost

Marginal Revenue Product = MP times Product Price

Add as much of the highest MRP input and maximize profit when price of input equals MRP


Elasticity of supply

Measures sensitivity in quantity supplied to change in price. Inelastic if change in price does not affect supply, creating economic rents.