Chapter 12 Flashcards
Short Run
period of time where factors of production are fixed (land, labor, capital)
Long run
period of time where all factors of PRODUCTION are variable.
Short Run:
Items sold more than variable cost, what should business do?
AR > AC
Keep going even if it has losses.
Short Run:
Items sold less than average variable cost, what should business do?
AR<AC
Shut down
Econ Profit zero means what?
total sales (tot rev) jsut covers both fixed and variable cost.
Price of AR and AC are equal.
Long run, cost are all what?
Variable.
Long run:
AR< AC what does business do?
Shut down
Economies of scale
More units of goods or services can be produced on larger scale with less cost ..
like costco
Result from factors like mass production, more efficient equipment and tech.
Diseconomies of scale
company grows so big that the cost per unit increase.
Result from increasing bureaucracy of larger firm that leads to inefficiency, problems motivating large workforce.
Think of having three people with one pizza oven.. having two is better because the third person just gets in the way.
Law of diminishing returns
as more resources are added, holding the quantities of other resources are fixed (like pizza oven) , output increases at decreasing rate. because more workers with fixed resource = inefficiency
law of diminishing marginal returns is a theory in economics that predicts that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output.
To max profit what doe MC and MR need to be?
MC = MR
Kinked Demand
The assumption that competitors are unlikely to match a price increase by a competitor, but very likely to match a price decrease by a competitor.
Elastic demand
Elastic demand refers to degree to which demand responds to a change in economic factor like price.
Demand changes with price.
change in quantity DEMANDED due to change in price is large
Inelastic Demand
Change in quantity DEMANDED due to change in price is small .
Demand stays constant regardless of economic change/price.
Cournot Model
Firms with same MC choose price based on price other firm had in previous period.
Stackelberg
price decisions are made at same time … its simultaneous
Nash
The choice of all firms are such that no other choice makes any of the firms better off.
N-Firm Concentration Ratio
Formula
What does lower ratio mean?
what does higher ratio mean?
Market Share = Firm sales/ tot market sales
Low = competitive market
High = oligopoly
HHI
Herfindahl-Hirschman Index
Sum of squared market shares of N largest firms in the market.
More sensitive to mergers
Ignores barriers of entry.
Perfect competition is characterized by the following
Many firms, each small relative to the market
Very low barriers to entry into or exit from the industry
Homogeneous products that are perfect substitutes; no advertising or branding
No pricing power
Monopoly is characterized by the following:
A single firm that comprises the whole market
Very high barriers to entry into or exit from the industry
Advertising used to compete with substitute products
Significant pricing power
Monopolistic competition is characterized by the following:
Many firms
Low barriers to entry into or exit from the industry
Differentiated products; heavy advertising and marketing expenditure
Some pricing power
Oligopoly markets are characterized by the following
Few sellers
High barriers to entry into or exit from the industry
Products that may be homogeneous or differentiated by branding and advertising
Firms that may have significant pricing power
Perfectly inelastic
When the demand remains constant despite price fluctuations
Perfectly elastic demand
Perfectly elastic demand is when the demand for the product is entirely dependent on the price of the product. This means that if any producer increases his price by even a minimal amount, his demand will disappear. Customers will then switch to a different producer or supplier.
