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.
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.
How would a subsidy on raw materials affect a firm's cost curves?
It would likely decrease variable costs, shifting AVC and ATC downward.
How might increased regulation affect a firm's long-run average total cost?
It could lead to diseconomies of scale due to increased compliance costs.
How does a price ceiling affect firms in a perfectly competitive market?
It can lead to shortages and reduce firms' profits, potentially causing some firms to exit the market.
How does a tax on each unit of output affect the firm's cost curves and profit-maximizing output?
It increases the marginal cost (MC) and average total cost (ATC), leading to a decrease in the profit-maximizing output.
How does a government-imposed minimum wage affect a firm's cost structure?
It increases the variable costs (VC) and average variable cost (AVC), potentially leading to a decrease in the profit-maximizing output.
How does a government subsidy on capital investment affect a firm's long-run average total cost (LRATC)?
It can lead to economies of scale and a decrease in the LRATC, as the firm can produce more output at a lower cost.
How does a change in environmental regulations affect a firm's cost curves and production decisions?
It can increase the firm's fixed costs (FC) and variable costs (VC), leading to a decrease in the profit-maximizing output and potentially causing some firms to exit the market.
How does a government policy promoting free trade affect firms in a perfectly competitive market?
It can increase competition and decrease prices, leading to a decrease in profits for some firms and potentially causing some firms to exit the market.
How does a government policy supporting research and development (R&D) affect a firm's long-run average total cost (LRATC)?
It can lead to technological advancements and economies of scale, resulting in a decrease in the LRATC.
How does a government policy restricting immigration affect a firm's labor costs and production decisions?
It can increase labor costs and decrease the availability of labor, leading to a decrease in the profit-maximizing output and potentially causing some firms to exit the market.