Chapter 13 VOCAB Industrial Organization The study of how firms decisions about prices and quantities depend on the market conditions they face Total Revenue The amount a firm receives for the sale of its output Total Cost The market value of the inputs a firm uses in production FC VC Profit Total Revenue minus Total Cost TR TC Explicit Costs Input costs that require an outlay of money by the firm Implicit Costs Input costs that do not require an outlay of money by the firm Economic Profit Total Revenue minus Total Cost including both INPLICIT EXPLICIT Accounting Profit Total Revenue minus EXPLICIT COST Production Function The relationship between quantity of inputs used to make a good and the quantity of output of that good As the number of workers increases the marginal product declines and the production function becomes flatter Marginal Product The increase in output that arises from an additional unit of input Diminishing Marginal Product The property whereby the marginal product of an input declines as the quantity of the input increases Fixed Costs Costs that do not vary with the quantity of output produced Variable Costs Costs that vary with the quantity of output produced Average Total Cost ATC TC Q When the quantity produced is large the total cost curve becomes steeper which reflects DIMINISHING MARGINAL PRODUCT Average Fixed Cost AFC FC Q Average Variable Cost AVC VC Q Marginal Cost MC The increase in total cost that arises from an extra unit of production Change in TC Change in Q Efficient Scale The quantity of output that minimizes ATC Economies of Scale The property whereby long run ATC FALLS as the quantity of output increases Diseconomies of Scale The property whereby long run ATC RISES as the quantity of output increases Constant Returns to Scale The property whereby the long run ATC stays the same as the quantity of output changes Accountants measure the explicit costs but USUALLY ignore the implicit costs When a firm is making economic losses firm owners will eventually close down the business and exit the industry The division of total costs between fixed and variable costs depends on the time INFO horizon When the quantity of coffee produced is already high the marginal product of an extra worker is low and the marginal cost of an extra cup of coffee is large Average fixed cost always declines as output rises because the fixed cost is spread over a larger number of units Average variable cost typically rises as output increases because of diminishing marginal product Average fixed cost declines rapidly at first and then more slowly The bottom of the U shape occurs at the quantity that minimizes average total cost Whenever marginal cost is less than average total cost average total cost is falling Whenever marginal cost is greater than average total cost average total cost is rising Analogy ATC GPA MC Grade in future course If grade in future course is below GPA your GPA will fall If grade in future class if above GPA your GPA will rise The marginal cost curve crosses the average total cost curve at its minimum Marginal cost eventually rises with the quantity of output The average total cost curve is U shaped The marginal cost curve crosses the average total cost curve at the minimum of average total cost Many decisions are fixed in the short run but variable in the long run All of the short run curves lie on or above the long run curve because firms have Economies of scale often arise because higher production levels allow Diseconomies of scale can arise because of coordination problems that are greater flexibility specialization among workers inherent in any large organization At high levels of production the benefits of specialization have already been realized and coordination problems become more severe as the firm grows larger Thus long run average total cost is falling at low levels of production because of increasing specialization and rising at high levels of production because of increasing coordination problems Term Definition Mathematical Description Explicit costs Costs that require an outlay of money by the firm Implicit costs Fixed costs Costs that do not require an outlay of money by the firm Costs that do not vary with the quantity of output produced FC Variable costs Costs that vary with the quantity of output producedVC Total cost The market value of all the inputs that a firm uses in production TC FC VC Average fixed cost Fixed cost divided by the quantity of output AFC FC Q Average variable cost Variable cost divided by the quantity of output AVC VC Q Average total cost Total cost divided by the quantity of output ATC TC Q Marginal cost The increase in total cost that arises from an extra unit of production MC TC Q
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