Questions and Answers
What does the law of diminishing marginal productivity state?
What is marginal product?
The extra output produced on using one more unit of labor.
What does average product measure?
Productivity with a particular number of workers.
What is the relationship between average product and marginal product?
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What is the short-run in economics?
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What characterizes the long-run in economics?
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What is an explicit cost?
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What is an implicit cost?
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What is marginal cost?
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What does the relationship between marginal cost and marginal product indicate?
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What is a fixed cost?
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What is a variable cost?
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What are the two necessary conditions for profit maximization?
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What does the MR = MC rule indicate?
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What are economies of scale?
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What is the difference between economic profit and accounting profit?
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What characterizes a competitive market?
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How does marginal cost relate to short-run competitive supply?
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What is a shutdown point?
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Study Notes
Law of Diminishing Marginal Product
- Principle indicating increasing one input with others constant initially boosts output but later sees limited or negative effects.
Marginal Product
- Refers to the additional output generated by using one more unit of labor.
Average Product
- Productivity measure calculated by dividing total product by the number of workers involved.
Relationship between Average Product and Marginal Product
- Marginal Product denotes output increase from adding an input unit; Average Product is total output divided by input quantity.
Short-run
- Defined as a period when at least one production factor is fixed.
Long-run
- Characterized by all factors of production being variable.
Explicit Cost
- Direct payments made during business operations such as wages, rent, and materials.
Implicit Cost
- Costs that have occurred but aren’t explicitly reported; represent opportunity costs of using internal resources.
Marginal Cost
- Additional cost incurred by producing one more unit of a product or service.
Relationship between Marginal Cost and Marginal Product
- Marginal Cost is the expense of producing one more product unit, while Marginal Product is the extra output from additional input. They are inversely related: as one increases, the other decreases.
Fixed Cost
- Costs remaining constant regardless of changes in production or sales levels.
Variable Cost
- Costs that fluctuate based on output levels.
Relationship between Total Product Curve and Total Cost Curve
- Not specified but implies interaction between total output and associated costs.
Relationship between Marginal Product and Marginal Cost
- They are inversely related, with increased Marginal Product leading to decreased Marginal Cost, and vice versa.
Conditions for Profit Maximization
- Not specified; implies necessity for two key criteria.
MR = MC Rule for Profit Maximization
- Indicates that profit is maximized when Marginal Revenue equals Marginal Cost.
Economies of Scale
- Occur due to decreasing per-unit fixed costs as production quantity increases, distributing fixed costs over more units.
Economic Profit vs. Accounting Profit
- Economic profit accounts for both explicit and implicit costs; accounting profit considers only explicit costs.
Significance of Positive Economic Profit
- Represents the difference between sales revenue and the opportunity costs of inputs, highlighting profitability beyond mere revenue.
Salient Characteristics of a Competitive Market
- Not detailed but implies essential traits defining competitive scenarios.
Marginal Cost and Short-run Competitive Supply
- Perfectly competitive firms produce where marginal revenue equals price and marginal cost, forming their short-run supply curve based on profit-maximizing output.
Shutdown Point
- Represents a situation where operations yield no benefits, indicating whether to continue or temporarily halt production.
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Prepare for your Micro Economics Exam 2 with these flashcards. Each card focuses on key concepts such as the Law of Diminishing Marginal Product and Marginal Product, providing definitions and insights to help you understand these fundamental economic principles.