Economics Test 3 (Part 1)

Productivity

The amount of goods and services produced per unit of input.

Business owners look at their productivity in order to maximize efficiency and profit.

Importance of Productivity

Fixed Input

an input whose quantity is fixed for a period of time and cannot be varied.

Variable Input

an input whose quantity the firm can vary at any time.

Short Run

the time period in which at least one input is fixed. It reflects ways in which firms respond to changes in output and can increase or decrease output using more or less of some factors.

Long Run

the time period in which all inputs can be varied. This allows the firm to increase its total capacity, not just short term capacity, and it is associated with a change in the scale of production.

Total Product

All of the product a company makes in a given period of time with a given amount of input.

Marginal Output (MPL)

the change in output generated by adding one more unit of input.

Average Product

the average output per unit of the variable input.

Law of Diminishing Returns

as more of one input is added to a fixed supply of other resources, productivity increases up to a point.

1. Increasing marginal returns

2. Diminishing marginal returns

3. Negative marginal returns

Three stages of the law of diminishing returns

Cost of Production

The expenses that a company faces to function and produce its product.

1. Fixed

2. Variable

3. Total

4. Marginal

Categories of cost of production

TC=FC+VC

How to find total cost

Change in total cost/change in output

how to find marginal cost

ATC = TC/Q

How to find average total cost

AVC = TVC/Q

How to find average variable cost

AFC = TFC/Q

How to find average fixed cost

Perfect Competition

Ideal market structure in which consumers and producers each compete directly and fully under the law of supply and demand.

Monopoly

A single producer controls all production of a good or service.

Monopolistic Competition

Differ from perfect competition in one key aspect, sellers offer different, rather than identical, products.

Oligopoly

a market structure in which a few large sellers control most of the production of a good or service.

1. The number of firms in the market (one, few, many)

2. Whether the goods offered are identical or differentiated.

The dimensions looked at when determining market structures

1. Many buyers and sellers act independently

2. Sellers offer identical products

3. Buyers are well informed about products

4. Sellers can enter or exit the market easily

4 conditions for a market to be perfectly competitive

1. both buyers and sellers in monopolistic competition compete under the laws of supply and demand.

2. buyers and sellers acting independently

3. buyers who are well informed about products

4. ease of market entry or exit.

similarities between perfectly competitive and monopolistically competitive markets

Sellers offer different, rather than identical, products in a monopolistically competitive market.

differences between perfectly competitive and monopolistically competitive markets

Product Differentiation

a marketing strategy designed to distinguish a companies product or service from others.

Nonprice competition

Companies distinguish their products or services based on characteristics, not price. Strongly utilize advertising.

Brand name loyalty

When people only buy from a specific brand, even though there are other brands offering similar products.

1. There are only a few large sellers

2. Sellers offer identical or similar products

3. Other sellers cannot enter the market easily

3 conditions for oligopoly

1. Nonprice Competition

2. Interdependent Pricing

3. Collusion

4. Cartels

How oligopolies try to control prices.

1. There is a single seller

2. No close substitute goods are available

3. Other sellers can not enter the market easily.

3 conditions of a monopoly

natural, geographical, technological, government

4 types of monopolies

1. There is a single large seller that produces a good or service most efficiently.

   1. Often governments will grant these producers exclusive rights which allows them to be the only producer to sell that product in that market.

Natural Monopoly

Monopolies can also form because of market’s potential for profit is limited due to geographic location.

Geographical Monopoly

1. Occur when a producer develops new technology that enables the creation of a new product or changes the way an existing product is made.

   1. Protected by patents

Technological Monopoly

1. Any market in which a government is the sole seller of a product is a government monopoly.

2. Often run monopolies, usually with basic necessities like public utilities.

Government Monopoly

Fixed Cost

Costs that do not change no matter how many goods are made.

• Rent

• Interest on loans

• Property insurance premium

• Local and state property tax.

• Salaries

• Routine wear and tear on machines

Examples of fixed cost

Variable Cost

Change as the level of output changes

• Costs of raw materials.

• Wages

Examples of variable cost

• At least one factor is fixed but all other factors are capable of being changed.

• Reflects ways in which firms respond to changes in output (Demand)

• Can increase or decrease output using more or less of some factors.

Factors of Short Run

• This allows the firm to increase its total capacity, not just short term capacity.

• Associated with a change in the scale of production.

• The period of time varies according to the firm and the industry.

Factors of Long Run

Marginal Cost

the additional cost of producing one more unit of output.

Business owners will consider varying the amount of their inputs in order to increase productivity.

What will producers do to effect productivity