Microeconomics Principles: Production and Cost Analysis

Production Theory: Short-Run vs. Long-Run

What is the difference between the short-run and the long-run from the perspective of production theory?

In the short run, only labor varies, and in the long run, both labor and capital vary.

Profit Analysis: Accounting vs. Economic

Accounting profit is ________ compared to economic profit, because accountants ________ opportunity costs in their calculations.

Bigger; do not consider.

Profit Maximization Strategies

A firm will maximize profits when:

The difference between Marginal Revenue and Marginal Cost is the greatest.

If a competitive firm is producing a level of output where marginal revenue exceeds marginal cost, the firm could increase profits if it:

Increased production.

In order to maximize profits, a firm will:

Produce where Marginal Revenue equals Marginal Cost.

Market Equilibrium and Firm Decisions

In the long-run equilibrium in a competitive market, firms are operating at:

All the above.

A grocery store should close at night if the:

Variable costs of staying open are greater than the total revenue.

In a competitive market, the marginal revenue for selling an additional unit of the good is equal to:

The price of the good being sold.

In the short-run, the competitive firm's supply curve is the:

Portion of the marginal cost curve that lies above the minimum average variable cost.

Key Economic Definitions

• Opportunity Cost: Everything that needs to be given up whenever a choice is made.
• Variable Cost: Wages paid to factory labor.
• Marginal Product: Change in a variable unit of an input.
• Production Function: A graph showing how a change in the amount of a single variable input changes total output.
• Total Product: Total output or production by a firm.
• Fixed Costs: A cost whose amount does not change according to output level (e.g., rent, property taxes, payments on loans).
• AFC (Average Fixed Cost): How much you are paying in fixed cost to produce one item (AFC = TFC / Q).
• Accounting Profit: Total revenue minus total explicit cost.
• Price Taker: A buyer or seller that is unable to affect the market price.
• ATC (Average Total Cost): Total costs divided by quantity of output.
• Implicit Costs: Input costs that do not require an outlay of money by the firm.
• Law of Supply: This states that as the price of a good or service increases, the supply of that good also increases.

Impact of Energy Price Fluctuations

What happens to average total cost curves when energy is a fixed cost and energy prices rise?

When fixed costs increase, so will average total costs. The ATC curve will shift upward.

What happens to the marginal cost curve when energy is a fixed cost and energy prices rise?

The Marginal Cost Curve is not affected if the variable costs do not change.