Microeconomics > Microeconomics Cheatsheet
Law of diminishing returns: when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
Average product: the average amount produced by each unit of a variable factor of production.
Marginal product: the additional output that can be produced by adding one more unit of a specific input, ceteris paribus. (AP is at its maximum at the point of intersection with MP.
Fixed cost: any cost that does not depend on the firm’s level of output. These costs are incurred even if the firm is producing nothing. No fixed cost on the long run.
Variable cost: cost that depends on the level of production chosen.
Total cost (TC): fixed costs + variable costs. TC=TFC+TVC
Total fixed costs (TFC): (overhead) the total of all costs that do not change with output, even if output is zero. TFC is a straight horizontal line. No TFC on the long run!!!!
Average fixed cost (AFC): total fixed cost divided by the number of units of output, a per-unit measure of fixed costs. As output increases, AFC declines because we are dividing a fixed number by a larger and a larger quantity.
Total variable cost (TVC): the total of all costs that vary with output in the short run. The TVC curve expresses the relationship between TVC and total output. Since all inputs are variable in the long run :TVC=TC=wL+rK
Marginal cost (MC): the increase in total cost that results from producing one more unit of output. MC reflects changes in VC.
Average variable cost (AVC): total variable cost divided by the number of units of output.
Average total cost (ATC): total cost divided by the number of units of output. ATC=AFC+AVC (AFC falls with output, an ever-declining amount is added to AVC. AVC and ATC get closer together as output increases, but the two lines never meet.
Total revenue (TR): the total amount that a firm takes in from the sale of its product:P*Q
Marginal revenue (MR): the additional revenue that a firm takes in when it increases output by one additional unit. In perfect competition: P=MR (P=MR=d)
Shut-down point: the lowest point on the AVC curve. When price falls below the minimum point on AVC, TR is insufficient to cover variable costs and the firm will shut down and bear losses equal to fixed costs.
Increasing returns to scale (economies of scale): an increase in a firm’s scale of production leads to lower costs per unit produced.
Constant returns to scale: and increase in a firm’s scale of production has no effect on costs per unit produced.
Decreasing returns to scale (diseconomies of scale): an increase in a firm’s scale of production leads to higher costs per unit produced.
(All short-run AC curves are U-shaped, because we assume a fixed scale of plant that constrains production and drives MC upward as a result of diminishing returns.)
Marginal product of labor (MPL): the additional output produced by one additional unit of labor.
Marginal revenue product (MRP): the additional revenue a firm earns by employing one additional unit of input, ceteris paribus. MRP(L)=MP(L)*P(X)
Perfectly competitive firm: large number of firms, each firm producing the same product, firms can enter and exit the market freely, the consumer is perfectly informed about the product, price taker=because there are many firms, one firm has no control over the price. If the firm increase the price even a little bit, people would buy it from the competitors and the sales would drop to zero. If the firm lowers the price others will do the same, so the market price will be the same for every firm again. It is price taker because its price is fixed at the market price. Perfectly elastic demand: demand curve is the MR curve, straight, horizontal line (at the market price)
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