1. dcsvgeerhnIt is the annual flow of net income generated by an investment expressed as a percentage of the total investment
2. A normal rate of return is the rate of return on capital that is just sufficient to keep owners satisfied.
3. Marginal product versus average product
Marginal product is the additional input that can be produced by hiring one more unit of a specific input, holding all other input quantities constant
4. Short run is the period where the firm is operating under a fixed scale (fixed factors) of production; and, new firms can neither enter nor exit an industry.mm
Long run is ...view middle of the document...
Hence, as output rises, average cost of production falls. This is what is called economies of scale: a reduction in cost per unit of output that follows from a larger scale of production.
* The sources of economies of scale are mostly technological. However, some result from sheer size (buying in volume for lower prices)
Constant returns to scales means that the quantitative relationship between input and output stays constant
Decreasing returns to scale is when average cost increases with scale of production. Its most often cited cause is bureaucratic inefficiency.
6. Long- run adjustments and mechanism.
a. Long run adjustments to short run condition: in a long run equilibrium, each firm will choose the scale of plant that produce its goods at minimum long run average cost (optimal scale of plant). This is because competition drives firms to adopt not just the most efficient technology in the short run but also the most efficient scale of operation in the long run.
b. Long run mechanism: (1) investment flows toward profit opportunities. (2) The entry and exit of firms involve the capital market. Indeed, investment will favor those industries in which profits are made. Industries in which firms undergo losses will gradually contract from disinvestment. (3) In long- run competitive equilibrium,
hjP = SRMC=SRAC=LRAC and (4) economic profits are zero.