Chapter 11 Flashcards
Economic profit (pi) formula
TR-Total economic cost
TR- Explicit costs- Implicit costs
Perfect competition
market structure where all firms are price takers, produce a homogenous product, and there are no barriers to entry
Perfectly elastic demand
horizontal demand facing a single price-taking firm in a competitive market (E= infinity) (D= MR)
Shut down
producing no output in the short run but still pays for fixed costs
Profit margin
difference between price and ATC
Profit margin= P-ATC
Average profit
total profit divided by quantity, measures the profit per unit and its equivalent to profit margin when all units sell for the same price
Pi/Q
Can profit and profit margin both be maximized at the same time?
No, they cannot be maximized at the same time. Therefore, profit margin/ AP should be ignored when making profit- maximizing decisions
Breakeven points
output levels where P=ATC and profit=0
Shut down price
price below which a firm shuts down in the short run (minimum AVC)
Where is the SR supply curve for an individual firm on a graph?
the portion of the MC curve above the minimum of the AVC curve
What is the quantity supplied when prices are set lower than the minimum AVC?
0
What is the formula for producer surplus and what shape is it on a graph?
PS= TR- TVC
Trapezoid, A= (b1+b2/2)h
Long run competitive equilibrium
condition where all firms are producing where P= LMC and economic profits are zero (P=LAC)
Are firms maximizing profit in LR competitive equilibrium? How does it occur?
Yes, and there is no incentive to enter/ leave the market because economic profits are zero
It occurs because of firms entering/ exiting the market, which adjusts so that P=LMC=LACmin
Constant-cost industry
an industry in which input prices remain constant as all firms in the industry expand output
Increasing-cost industry
industry in which input prices increase as all firms in the industry expand output
For both constant-cost and increasing-cost industries, what do the curves look like? What do the LR supply curves show?
Constant-cost curve is flat, increasing-cost is upward sloping
They show the various levels of industry output that allow the industry to reach LR competitive equilibrium
For both constant-cost and increasing-cost industries, what is economic profit equal to? What do both curves provide information of?
Economic profit=0
They provide us the minimum LAC and LMC for all firms
Marginal revenue product (MRP)
additional revenue earned when firms hire one more unit of input
MRP=(change in TR/change in I)= MRMP= PMP
When should another unit be hired according to MRP?
If MRP is greater than the price of the input
Employers should hire inputs at which MRP=input price
Average revenue product (ARP)
average revenue per worker
ARP= TR/L= PQ/L= PAP
Implementation of general rules: Should the firm produce or shut down?
Produce when market price is greater than or equal to AVCmin, otherwise shut down
Implementation of general rules: How much should a firm produce?
Produce where P=SMC
