on 27-Sep-2015 (Sun)

economic profit = accounting profit- implicit opportunity costs = total revenue- total economic costs = total revenue- explicit costs- implicit costs

Positive (negative) economic profit has a positive (negative) effect on the market value of equity.

Economic rent to a factor of production is the difference between its earnings and its opportunity cost.

Under perfect competition, each firm faces a horizontally constant demand curve

Fixed costs are those costs that do not vary directly with the quantity produced (e.g., plant and equipment).

Variable costs are those that vary directly with the quantity produced (e.g., labor, raw materials).

Total cost of a given output is equal to total fixed costs plus total variable costs.

Marginal cost is the increase in total variable costs for one additional unit of output.

Average fixed cost (AFC) is fixed cost per unit of output and declines with greater quantities of output

For a given level of fixed costs, marginal cost first decreases and then (at some quantity of output) begins to increase

Average variable cost (AVC) is variable cost per unit of output and first decreases and then increases with greater quantities.

Average total cost (ATC) is total cost per unit of output and is equal to average fixed costs plus average variable costs.

The vertical distance between the ATC and AVC curves is equal to AFC.

Both AVC and ATC are at their minimum values where they are equal to marginal cost.

Under perfect competition:

• The breakeven quantity of production is the quantity for which price (P) = average total cost (ATC) and total revenue (TR) = total cost (TC).
• The firm should shut down in the long run if P < ATC so that TR < TC.
• The firm should shut down in the short run (and the long run) if P < average variable cost (AVC) so that TR < total variable cost (TVC)

Under perfect competition, the breakeven quantity of production is the quantity for which

• price (P) = average total cost (ATC) and
• total revenue (TR) = total cost (TC).

Under perfect competition, the firm should shut down in the long run if P < ATC so that TR < TC.

Under perfect competition, the firm should shut down in the short and long run if P < average variable cost (AVC) so that TR < total variable cost (TVC).

Under imperfect competition (firm faces downward sloping demand):

• Breakeven quantity of production is the quantity for which TR = TC.
• The firm should shut down in the long run if TR < TC.
• The firm should shut down in the short and long run if TR < TVC.

Under imperfect competition, breakeven quantity of production is the quantity for which TR = TC.

Under imperfect competition, the firm should shut down in the long run if TR < TC.

Under imperfect competition, the firm should shut down in the short and long run if TR < TVC.

The profit-maximizing quantity of output is the output for which the difference between total revenue and total cost (TR- TC) is at a maximum.

A firm should increase production as long as marginal cost is less than marginal revenue, because the addition to total costs from additional production is less than the addition to total revenue from selling the additional output.

A firm should increase production as long as marginal cost is less than marginal revenue

The long-run average total cost (LRATC) curve shows the minimum average total cost for each level of output assuming that the plant size (scale of the firm) can be adjusted

A downward-sloping segment of an LRATC curve indicates economies of scale (increasing returns to scale). Over such a segment, increasing the scale of the firm reduces ATC.

Over downward-sloping segment of an LRATC, increasing the scale of the firm reduces ATC.

A downward-sloping segment of an LRATC curve indicates economies of scale (increasing returns to scale).

An upward-sloping segment of an LRATC curve indicates diseconomies of scale, where average unit costs will rise as the scale of the business (and long-run output) increases.

An upward-sloping segment of an LRATC curve indicates diseconomies of scale

A flat portion of an LRATC curve represents constant returns to scale

A firm's minimum efficient scale is represented by the minimum point on the LRATC curve and is the firm size that will minimize average unit costs.

In perfect competition, firms will eventually all operate at minimum efficient scale

The short run is a time period during which quantities of some firm resources are fixed.

A firm may continue to operate in the short run with economic losses as long as price is greater than AVC because the losses are less than total fixed costs.

In the long run, all factors of production are variable so a firm will maximize profits at the quantity for which marginal revenue equals marginal cost as long as price is greater than ATC. If price is less than ATC, the firm has economic losses and will minimize losses in the long run by going out of business and reducing ongoing losses to zero

In the long run, all factors of production are variable.

In the long run, a firm will maximize profits at the quantity for which marginal revenue equals marginal cost as long as price is greater than ATC.