Chapter 6 Flashcards
The characteristics of perfect Competition and what being a “Price-Taker” means for firms
- many small firms (small market share)
- standardized products
- no barriers to entry/exit
- Perfect info ex. agriculture (farms)
price takers = forced to accept the prevailing equilibrium price in the market
How to compute the marginal output and determine when diminishing marginal return sets in
△TR/ △Q
Diminishing returns = smaller new output (△Q decreases), MC increases
How to compute the reservation price for a supplier - how much a person needs to make to
provide that unit.
minimum price that the seller is willing to accept
MC= △ cost / △ Q (extra cost/ extra units)
Short run vs. long run: Know the difference between fixed and variable costs in the short run and
know that everything is variable in the long-run
long-run: A time period that is long enough for all factors of production to be variable.
short-run: A time period that is short enough for at least one factor of production to be fixed
ex. capital (buildings/tools/machines)
two types of costs: variable & fixed
variable: any cost that changes w/ the level of output
fixed: the same cost value for all output values
How to compute Marginal Cost (change in total cost/change in output or change in variable
cost/change output), Total Cost, and Total Revenue (TR)
MC= △ cost / △ Q
Total cost = FC + VC
TR = P*Q
Relationship between MC & Marginal Output
it is inverse
a firm still has fixed costs
even when no output is produced, Q=0
How to compute Average Variable Cost (AVC), Average Fixed Cost (AFC), and Average Total
Cost (ATC), and recognize their respective shapes in a graph
AVC = VC/Q
AFC = FC/Q
ATC = AVC +AFC
ATC will usually be higher than AVC on a graph
When MC intersects AVC and ATC, and why these points must be the respective minimum
values for AVC and ATC.
at these points MC= the avg. cost
AFC is always diminishing when
Q is increased
Rule #1:
Optimum or profit maximizing quantity:
MR=MC or P=MC under perfect competition
Rule #2:
formulas for economic profit
- TR-TC
- Q(P-ATC)
Rule #3:
When to shut down a firm (in the short run)
TR<VC or P<AVC
Calculate producer surplus in a graph as the triangle below the market price and above the supply
curve.
b*h/2
