2023 Test 3 Flashcards
What are Explicit Costs? How do you obtain the costs.
Payment made for the use of a resource. They are the Accounting costs added up. Create a paper trail.
What are Implicit Costs? Name the implicit costs of starting a firm.
The value of resources used, even when no direct payment was made.
a. Use of personal savings
b, Use of personal property
c. Labor services payments from another job given up
What is Economic Profit(or Loss)?
The difference between total revenues and total economic costs.
Formula: Total Revenue - Economic Costs
What is Normal Economic Profit?
When TR = Econ. Cost
Meaning 0 economic profit but still accounting profit.
What is Market Structure?
The number and “relative size” of the firms in a market.
Relative size:How much(%) does 1 firm produce compared to others.
What is Perfect Competition? /Perfectly competitive Market
A market in which no buyer or seller has market power. Has:
- Large number of firms
- the products of the different firms are (nearly) identical
- Low entry barriers
- MR = p
- Zero economic profit
- Perfect information
What is Market Power?
The ability to alter the market price of a good or service.
Why is there no Market Power in a Perfectly competitive Market?
output is so small in relation to market volume that its output decisions have no perceptible impact on price.
In today’s US economy, how many firms fit the perfectly competitive model?
Approximately 5% of markets fit this model.
In a perfectly competitive market, what is the price and what determines it?
The price in this market is the equilibrium, since it is perfectly elastic it is a horizontal line. The market sets the price hence firms in PCF are known as “Price Takers”.
What is the Production Decision in a PCF?
How much output to produce in the short-run. Since market sets price, only choice is quantity.
What is Total Revenue?
Price X Quantity Sold
What is the “short run”
The time period during which some productivity resources cannot be changed.
What are Fixed Costs?
Costs of production that don’t change when the rate of output is altered such as rent, utilities, equipment fees. There is no way to avoid fixed costs in the short run.
What are Variable Costs?
Costs that change with the level of output produced. If we don’t need to produce much we can lower working hours, buy less material etc. and vice versa.
What is Marginal Cost(MC)?
The inscrease/change in total costs associated with producing one more unit of output.
Diminishing returns in production cause marginal costs to increase as the rate of output is expanded. The shape of it looks like the Nike logo.
What is the relationship between average total cost (ATC) and marginal cost (MC)?
the MC curve intersects the ATC curve at its lowest point (point m). Thus average total costs decline as long as the marginal cost curve lies below the average cost curve
What is Marginal Revenue(MR)?
The change in total revenue that results from a one-unit increase in the quantity sold.
For perfectly competitive firms, price equals marginal revenue.
What does the Profit Maximization Rule say?
To maximize profits continue producing output to the point until where MR(P)=MC.
This also means, never produce a unit that costs more to produce then the price it’s being sold.
What is the Shutdown Point?
When the price equals AVC. The shutdown decision is a short-run response.
What is the Investment Decision?
The long run decision to build, buy, or lease plants and equipment; to enter or exit an industry.
if P > ATC -Enter or expand since high profit
if p < ATC -Exit or reduce since loss
if p= ATC - Maintain existing capacity
