All Flashcards
What are the key differences between the short run and the long run in production?
In the short run, at least one input is fixed, while in the long run, all inputs are variable.
Compare and contrast accounting profit and economic profit.
Accounting profit only considers explicit costs, while economic profit considers both explicit and implicit costs (opportunity costs).
Differentiate between economies of scale and diseconomies of scale.
Economies of scale occur when LRATC decreases as output increases, while diseconomies of scale occur when LRATC increases as output increases.
What is the difference between average fixed cost (AFC) and average variable cost (AVC)?
Average fixed cost (AFC) is fixed cost divided by quantity, while average variable cost (AVC) is variable cost divided by quantity.
What is the difference between marginal cost (MC) and average total cost (ATC)?
Marginal cost (MC) is the additional cost of producing one more unit, while average total cost (ATC) is the total cost divided by quantity.
What is the difference between increasing returns to scale and decreasing returns to scale?
Increasing returns to scale occur when output increases by a larger proportion than the increase in inputs, while decreasing returns to scale occur when output increases by a smaller proportion than the increase in inputs.
What is the difference between normal profit and economic profit?
Normal profit is the minimum level of profit needed to keep a firm in the industry, while economic profit is the profit above and beyond normal profit.
What is the difference between a price taker and a price maker?
A price taker is a firm that has no control over the market price, while a price maker is a firm that has some control over the market price.
What is the difference between explicit costs and implicit costs?
Explicit costs are the direct, out-of-pocket costs of production, while implicit costs are the opportunity costs of using resources that the firm already owns.
What is the difference between the short-run shutdown rule and the long-run exit decision?
The short-run shutdown rule states that a firm should shut down if price is less than average variable cost, while the long-run exit decision states that a firm should exit the market if it is incurring losses.
How does the Law of Diminishing Marginal Returns affect hiring decisions?
Firms will eventually see smaller output gains from each new worker, impacting optimal staffing.
How do economies of scale benefit large corporations?
Lower LRATC allows for competitive pricing and higher profit margins.
How does the shutdown rule guide a business owner's decision?
If P < AVC, the firm should temporarily cease production to minimize losses.
How does free entry and exit affect long-run profits in perfect competition?
It drives economic profits to zero as firms enter or exit in response to market conditions.
A local bakery is considering hiring a new baker. How should they use the concept of marginal product to make their decision?
They should compare the additional revenue generated by the new baker's output with the cost of hiring the baker. If the marginal product of labor is high enough to cover the cost, they should hire the baker.
A tech startup is experiencing rapid growth. How might diseconomies of scale affect their operations?
As the company grows, coordination and communication may become more difficult, leading to inefficiencies and higher average costs.
A small farm is deciding whether to stay open for another season. How should they use the shutdown rule to make their decision?
If the market price of their crops is less than their average variable cost, they should shut down production in the short run to minimize losses.
A clothing manufacturer is deciding whether to invest in new machinery. How should they consider the difference between accounting and economic profit?
They should consider both the explicit costs (e.g., the price of the machinery) and the implicit costs (e.g., the opportunity cost of investing in the machinery instead of other ventures) to determine whether the investment is economically profitable.
A restaurant owner is trying to decide how many waiters to hire. How should they use the profit-maximizing rule to make their decision?
They should hire waiters until the marginal revenue generated by each additional waiter equals the marginal cost of hiring that waiter.
How does understanding cost curves help a manager make informed decisions about production levels?
By analyzing the relationships between MC, ATC, and AVC, a manager can determine the optimal output level to minimize costs and maximize profits.
On a cost curve graph, what does the intersection of MC and ATC signify?
It signifies the minimum point of ATC, where the firm is producing at the lowest average total cost.
How does the shape of the LRATC curve indicate economies or diseconomies of scale?
A decreasing LRATC indicates economies of scale, while an increasing LRATC indicates diseconomies of scale.
In a perfectly competitive market graph, what does the horizontal demand curve signify?
It signifies that the firm is a price taker and can sell any quantity at the market price.
What does the area between the ATC curve and the demand curve represent for a firm in a perfectly competitive market?
If the demand curve is above the ATC curve, the area represents economic profit. If the demand curve is below the ATC curve, the area represents economic loss.
How does an increase in fixed costs affect the ATC curve?
It shifts the ATC curve upward, but does not affect the MC curve.
How does an increase in variable costs affect the AVC and MC curves?
It shifts both the AVC and MC curves upward.
In the graph of the perfectly competitive firm, what is the relationship between the demand curve, marginal revenue (MR), and price?
The demand curve, marginal revenue (MR), and price are all equal and represented by a horizontal line at the market price.
In a graph of cost curves, how do you identify the profit-maximizing level of output?
The profit-maximizing level of output is where the marginal cost (MC) curve intersects the marginal revenue (MR) curve.
In a graph of the long-run average total cost (LRATC) curve, what does the minimum point represent?
The minimum point represents the minimum efficient scale, where the firm is producing at the lowest possible average cost in the long run.
How can you determine whether a firm is making a profit or loss by looking at its cost curves and demand curve?
If the demand curve is above the average total cost (ATC) curve at the profit-maximizing quantity, the firm is making a profit. If the demand curve is below the ATC curve, the firm is making a loss.