Chapter 2 Flashcards
If MR > MC?
Profits increases as Quantity increases
If MR <MC?
profits increase if quantity decreases
p>ATC
in the long run the firm should still operate
types of cost not avoidable in SR
Sunk costs and quasi fixed costs
what if a firm shuts down in the SR?
it can avoid quasi fixed costs but not sunk costs
Quasi Rents Costs
in the SR it is the difference between TR and avoidable costs (AC). it is the benefit of staying in business for the firm. Q*(TR - AC) total quasi rent. quasi rent per unit = p-ac
Assumptions of Perfect Competition
economies of scale, output is homogeneous, perfect information and there are no barriers to entry or exit
economies of scale
average costs will rise rapidly if a firm increases its output a relatively small amount. also large number of firms
Producer Surplus
difference between the minimum producers are willing to accept and what they actually receive
pareto optimum
an outcome is pareto optimum, to make one person better off without making another person worse off
potential pareto improvement
if an economic agent believes that from reallocation of resources it can make someone better off and hypothetically compensate the loser and still remain better off this is a new pareto optimum. it can increase TS (total surplus)
Market power
A firm has market power if it finds it profitable to raise price above marginal cost. The ability of a firm
to profitably raise price above marginal cost depends on the extent to which consumers can substitute
to other suppliers
Demand side substituion
occurs when products are differentiated. it is the extent to which other products are acceptable substitutions
supply side substituition
occurs when products are homogeneous, it is the ability that a consumer can switch to other suppliers for the same product
impact of elasticity of demand
the greater the elasticity of demand, the less market power it has in its ability to make change prics.
