Section 6

Question 1

Profit Formula

Answer 1

Total revenue minus total cost

Question 2

Total Revenue Formula

Answer 2

Price times quantity

Question 3

Total Product

Answer 3

TP

Output produced by all employees

Question 4

Marginal Product

Answer 4

MP

Change in total product divided by change in labor input

Additional output that is generated by an additional worker

Question 5

Marginal Product Changes

Answer 5

When marginal product increases then total product increases at an increasing rate.

When marginal product decreases but remains positive then total product will increase, but at a decreasing rate.

When marginal product is negative then total product will decline.

If marginal product is greater then average product then average product will rise.

Question 6

Law of diminishing returns

Answer 6

As successive input is added to a FIXED AMOUNT OF RESOURCES the increase of each additional variable resource will eventually decline

Assumes that units of labor are of equal quantity

Question 7

Average product

Answer 7

AP

Total product divided by units of labor

Is at it highest point when it is equal to marginal product.

Question 8

Explicit Costs

Answer 8

Out of pocket expenses

Question 9

Implicit Costs

Answer 9

Opportunity costs

Question 10

Accounting Profits

Answer 10

Subtract explicit costs from total revenue

Overstates the economic success of your company

Question 11

Economic Profits

Answer 11

Subtract explicit and implicit costs from total revenue

Question 12

Normal Profit

Answer 12

Minimum return to maintain a resource in it’s current use.

This is the same as earning a zero economic profit.

Question 13

Short-run Definition

Answer 13

Has at least one of its inputs or resources is fixed.

Time period to short to alter its plant capacity

Question 14

Long-run Definition

Answer 14

All resources are variable, there are no fixed costs.

Time period long enough to alter all resources, including plant capacity

Question 15

Fixed Costs

Answer 15

Costs that do not change as the level of production changes

Question 16

Variable Costs

Answer 16

Costs that change as output changes

Question 17

Total Fixed Cost

Answer 17

TFC

A flat cost that stays the same regardless of the amount of production.

Question 18

Total Variable Cost

Answer 18

TVC

The sum of all costs that increase as production increases.

Question 19

Total Cost

Answer 19

TC

Sum of total fixed costs and total variable costs.
TFC + TVC

Question 20

Marginal Cost

Answer 20

MC

Change in TC / change in output
OR
change in TVC / change in output

Question 21

Average Fixed Costs

Answer 21

AFC

Fixed costs divided by total output
TFC / output

Get smaller as more quantity is produced

Question 22

Average Variable Costs

Answer 22

AVC

total variable cost divided by output
TVC / output

Declines initially then raises again as diminishing returns require more resources

Question 23

Average Total Costs

Answer 23

ATC

Total cost divided by output
TC / output
OR
TFC + TVC / output

Question 24

MC & MP Relationship

Answer 24

MC is a mirror reflection of MP, and the AVC is a mirror reflection of AP

When marginal product is falling, marginal cost is rising

Question 25

MC, AVC, and ATC relationship

Answer 25

When MC exceeds ATC, ATC will rise MC will intersect the ATC curve at the minimum point MC will cross the AVC curve at the minimum point

Question 26

Long-run ATC

Answer 26

Called the planning curve Made up of tangency of the short-run ATC curves Curve is smooth and touches the minimum ATC of each corresponding level of output

Question 27

Economies of Scale

Answer 27

Decreasing long-run ATC cost curve. As plant size increases you have lower average costs of production

Question 28

Causes of Economies of Scale

Answer 28

Labor Specialization Managerial Specialization Efficient Capital Other factors: like startup costs, advertising costs

Question 29

Diseconomies of Scale

Answer 29

Increase in long-run ATC cost curve As plant size increases you have higher average costs of production

Question 30

Causes of Diseconomies of Scale

Answer 30

Problems with communication and cooperation Bureaucratic red tape More management and worker supervision

Question 31

Constant Returns to Scale

Answer 31

Long-run ATC does not change Point between where economies of scale end and diseconomies of scale start

Question 32

Minimum Efficient Scale

Answer 32

MES - The lowest level of output at which a firm can minimize long-run average costs

Question 33

Different Industries and their Scale

Answer 33

Long MES: large and small firms can coexist - apparel, food, furniture, banking Long ES and short DES: Automobile, steel, heavy industry, information technology, software/hardware Short ES and long DES: Farming, bakeries, clothing

Question 34

Natural Monopoly

Answer 34

When ATC is minimized when only one firm produces the particular good. Extreme version of when Industries that have a long ES and short DES favor large-scale producers, small companies can't reach the same scale.

Question 35

Economies of Scope

Answer 35

When per unit costs are lowered as the range or products produced increases - this is creating different but complimentary products and the shared production allows you to lower your cost per unit

Question 36

Sunk Costs

Answer 36

Costs that are no longer recoverable after they have occurred When making a decision you should ignore all sunk costs