Questions and Answers
A firm's ___________ consist of expenditures that must be made before production starts that typically, over the short run, _______________ regardless of the level of production.
fixed costs; do not change
______________ include all of the costs of production that increase with the quantity produced.
Variable costs
____________________________ occur when the marginal gain in output diminishes as each additional unit of input is added.
Diminishing marginal returns
In order to determine ____________, the firm's total costs must be divided by the quantity of its output.
Signup and view all the answers
In order to determine the average variable cost, the firm's variable costs are divided by __________.
Signup and view all the answers
The term _____________ is used to describe the additional cost of producing one more unit.
Signup and view all the answers
The term __________________ describes a situation where the quantity of output rises, but the average cost of production falls.
Signup and view all the answers
In microeconomics, the term _____________________ is synonymous with economies of scale.
Signup and view all the answers
The term 'constant returns to scale' describes a situation where __________.
Signup and view all the answers
If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises.
Signup and view all the answers
___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.
Signup and view all the answers
If a solar panel manufacturer wants to look at its total costs of production in the short run, what would provide a useful starting point?
Signup and view all the answers
All but one of the following can be classified as a variable cost arising from the physical inputs Marcella requires to operate her business. Which is it?
Signup and view all the answers
Why would labor be treated as a variable cost?
Signup and view all the answers
If a paper mill shuts down its operations for three months so that it produces nothing, what will be reduced to zero?
Signup and view all the answers
Fixed costs are important because, at least in the ___________, the firm _______________.
Signup and view all the answers
In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity.
Signup and view all the answers
What does the price elasticity of demand measure?
Signup and view all the answers
Price elasticity of demand is defined as:
Signup and view all the answers
Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.
Signup and view all the answers
Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.
Signup and view all the answers
The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in __________.
Signup and view all the answers
When demand is inelastic, what does that mean?
Signup and view all the answers
A price cut will increase the total revenue a firm receives if the demand for its product is:
Signup and view all the answers
The longer the time period considered, how does the elasticity of supply tend to change?
Signup and view all the answers
Taxes on goods with __________ demand curves will tend to raise more tax revenue for the government than taxes on goods with __________ demand curves.
Signup and view all the answers
What is the elasticity formula?
Signup and view all the answers
An elastic demand curve is characterized by a:
Signup and view all the answers
An inelastic demand curve is characterized by a:
Signup and view all the answers
Total Revenue Formula:
Signup and view all the answers
Income Elasticity of Demand Formula:
Signup and view all the answers
Average Total Cost (ATC) formula:
Signup and view all the answers
Average Variable Cost (AVC) formula:
Signup and view all the answers
Average Fixed Cost (AFC) formula:
Signup and view all the answers
Increasing returns to scale is defined as:
Signup and view all the answers
The law of diminishing marginal utility states:
Signup and view all the answers
Three factors of decision making include:
Signup and view all the answers
The law of diminishing returns states:
Signup and view all the answers
The marginal product of labor is defined as:
Signup and view all the answers
Marginal cost formula:
Signup and view all the answers
Total Cost Formula:
Signup and view all the answers
Fixed Cost Formula:
Signup and view all the answers
Variable Cost Formula:
Signup and view all the answers
Characteristics of Perfect Competition include:
Signup and view all the answers
Why in the long run are there zero profits in a perfect competition market?
Signup and view all the answers
Study Notes
Costs in Production
- Fixed costs must be incurred before production begins and remain unchanged in the short run, irrespective of output levels.
- Variable costs increase with the quantity produced, directly affecting total production costs.
- Average costs are calculated by dividing total costs by the quantity of output.
- Average variable cost is determined by dividing total variable costs by the quantity produced.
Marginal Costs and Returns
- Marginal cost refers to the additional cost associated with producing one more unit of output.
- Diminishing marginal returns occur when adding more input results in a smaller increase in output.
- Economies of scale refer to the reduction in average production costs as output increases.
- Constant returns to scale mean that output expansion does not affect average production costs.
- Decreasing returns to scale indicates that increased output raises average production costs.
Revenue and Demand Elasticity
- Price elasticity of demand measures how responsive the quantity demanded is to price changes, calculated as the percentage change in quantity divided by the percentage change in price.
- Demand is elastic if it significantly responds to price changes and inelastic if it is relatively unresponsive.
- Total revenue increases with a price cut if the demand for the product is elastic.
- Over time, the elasticity of supply tends to increase due to the adaptability of producers.
Tax Revenue and Elasticity
- Taxes on goods with elastic demand yield less revenue compared to taxes on goods with inelastic demand due to varying responsiveness to price changes.
Formulas and Concepts
- Total Revenue is calculated as P (price) multiplied by Q (quantity).
- Various cost and elasticity formulas include:
- Average Total Cost (ATC): Total Costs (TC) divided by Quantity (Q).
- Average Variable Cost (AVC): Variable Costs (VC) divided by Quantity (Q).
- Marginal Cost: Change in Total Cost (TC) divided by change in Quantity (Q).
- Total Cost (TC): Fixed Costs (FC) plus Variable Costs (VC).
Perfect Competition Characteristics
- A perfectly competitive market has many buyers and sellers, homogeneous products, and free entry and exit for firms.
- Long-run profits in a perfectly competitive market tend toward zero due to the influx of firms producing similar products, leading to thin margins as supply increases.
Utility and Decision-Making
- The law of diminishing marginal utility states that additional units of a good yield less satisfaction over time.
- Decision making can be impaired by ignoring opportunity costs, sunk costs, and unrealistic expectations about future behavior.
- The law of diminishing returns indicates that adding more of a variable input will eventually lead to decreased marginal output.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Prepare for your Economics Exam 2 with these flashcards that cover key concepts such as fixed and variable costs. Each card presents essential definitions and terms that are crucial for understanding production costs. Test your knowledge and boost your study efforts effectively!