Econ Exam 2 Flashcards

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.

Average costs Signup and view all the answers

In order to determine the average variable cost, the firm's variable costs are divided by __________.

the quantity of output Signup and view all the answers

The term _____________ is used to describe the additional cost of producing one more unit.

Marginal Cost Signup and view all the answers

The term __________________ describes a situation where the quantity of output rises, but the average cost of production falls.

Economies of Scale Signup and view all the answers

In microeconomics, the term _____________________ is synonymous with economies of scale.

Increasing Returns to Scale Signup and view all the answers

The term 'constant returns to scale' describes a situation where __________.

expanding all inputs does not change the average cost of production Signup and view all the answers

If a firm is experiencing _____________________, then as the quantity of output rises, the average cost of production rises.

Decreasing Returns to Scale Signup and view all the answers

___________ include all spending on labor, machinery, tools, and supplies purchased from other firms.

Total Costs 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?

Divide total costs into two categories: fixed costs that can't be changed in the short run and variable costs that can be. 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?

Physical Space for Gallery Signup and view all the answers

Why would labor be treated as a variable cost?

Producing larger quantities of a good or service generally requires more workers. 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?

Variable costs Signup and view all the answers

Fixed costs are important because, at least in the _, the firm _____.

short run; cannot alter them Signup and view all the answers

In order to calculate marginal cost, the change in ______________ is divided by the amount of change in quantity.

either total cost or variable cost Signup and view all the answers

What does the price elasticity of demand measure?

Responsiveness of quantity demanded to a change in price Signup and view all the answers

Price elasticity of demand is defined as:

the percentage change in quantity demanded divided by the percentage change in price Signup and view all the answers

Demand is said to be ___________ when the quantity demanded is very responsive to changes in price.

Elastic Signup and view all the answers

Demand is said to be _____________ when the quantity demanded is not very responsive to changes in price.

Inelastic 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 __________.

Price Signup and view all the answers

When demand is inelastic, what does that mean?

Consumers are not very responsive to changes in price. Signup and view all the answers

A price cut will increase the total revenue a firm receives if the demand for its product is:

Elastic Signup and view all the answers

The longer the time period considered, how does the elasticity of supply tend to change?

Increase 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.

Elastic; Inelastic Signup and view all the answers

What is the elasticity formula?

% change in quantity / % change in price Signup and view all the answers

An elastic demand curve is characterized by a:

Flat slope Signup and view all the answers

An inelastic demand curve is characterized by a:

steep slope Signup and view all the answers

Total Revenue Formula:

P x Q Signup and view all the answers

Income Elasticity of Demand Formula:

%∆Q/%∆Income Signup and view all the answers

Average Total Cost (ATC) formula:

TC/Q Signup and view all the answers

Average Variable Cost (AVC) formula:

VC/Q Signup and view all the answers

Average Fixed Cost (AFC) formula:

FC/Q Signup and view all the answers

Increasing returns to scale is defined as:

when long-run average total cost declines as output increases Signup and view all the answers

The law of diminishing marginal utility states:

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time Signup and view all the answers

Three factors of decision making include:

<ol> <li>Taking into account monetary costs but ignoring non-monetary opportunity costs 2. Failing to ignore sunk costs 3. Being unrealistic about their own future behavior</li> </ol> Signup and view all the answers

The law of diminishing returns states:

When additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines. Signup and view all the answers

The marginal product of labor is defined as:

the change in output from hiring one additional unit of labor Signup and view all the answers

Marginal cost formula:

change in TC/change in Q Signup and view all the answers

Total Cost Formula:

TC = TFC + TVC Signup and view all the answers

Fixed Cost Formula:

TC - VC = FC Signup and view all the answers

Variable Cost Formula:

TC - FC Signup and view all the answers

Characteristics of Perfect Competition include:

<ol> <li>Many buyers and many sellers. 2. The goods offered for sale are largely the same. 3. Firms can freely enter or exit the market.</li> </ol> Signup and view all the answers

Why in the long run are there zero profits in a perfect competition market?

So many firms are creating homogenous products, costs will get spread thinner due to increasing supply. 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.

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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!