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Economics Chapter 7 > Chapter 7.1 and 7.2 > Flashcards

Chapter 7.1 and 7.2 Flashcards

1
Q

Market Power and Market Failure

What is a firm?

A

A firm is an organization that employs factors of production to produce and sell a good or a service.

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2
Q

Market Power and Market Failure

What is an industry?

A

A group of one or more firms producing identical or similar goods or services

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3
Q

Market Power and Market Failure

What is market power?

A

Extent to which each individual firm in the industry is able to control the price at which it sells its product

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4
Q

Market Power and Market Failure

How does market power relate to market failure?

A

The greater the market power, the greater the allocative inefficiency.

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5
Q

Types of Market Structures

What are the different types of market structures?

A

-Perefect competition
-Monopoly
-Monopolistic competition
-Oligopoly

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6
Q

Characteristics of Market Structures

What are the market structures characterized by?

A

-Number of firms in industry
-Product differentiation
-Barriers of entry

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7
Q

Revenue

What is revenue?

A

Revenues are the payments firms receive when they sell the goods and services they produce over a given time period

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8
Q

Revenue

What is the firm’s total revenue (TR)?

A

The firm’s total revenue (TR) is obtained by multiplying the price at which a good is sold (p) by the number of units of the good sold (q): TR = P × Q

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9
Q

Revenue

What is the firm’s average revenue (AR)?

A

The firm’s average revenue (AR) is revenue per unit of output sold: AR = TR/Q = P x Q/Q = P

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10
Q

Revenue

What is the firm’s marginal revenue (MR)?

A

The firm’s marginal revenue (MR) is the additional revenue arising from the sale of an additional unit of output: MR = Δ TR/Δ Q

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11
Q

Revenue When Firms Have Some Control Over Price

What does the firm gain from having control over the price?

A

The price at which good is sold changes

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12
Q

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is elastic?

A

Lower price

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13
Q

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is inelastic?

A

Raise the price

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14
Q

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is unitary elastic?

A

The price is unchanged

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15
Q

The Short Run and The Long Run

What is the short run?

A

The period of time in which at least one factor of production is fixed and cannot be changed by the firm

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16
Q

The Short Run and The Long Run

What is the long run?

A

The period of time in which all factors of production are variable

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17
Q

Economic Cost

What are the kinds of economic costs dependent on?

A

Who owns the resources used by the firm. Resources are either owned by the firm itself, or are owned by outsiders to the firm from whom the firm buys them.

18
Q

Economic Cost

What are explicit costs?

A

Payments made by a firm to outsiders to acquire resources for use in production

19
Q

Economic Costs

What are implicit costs?

A

The sacrificed income arising from the use of self-owned resources by a firm

20
Q

Economic Costs

What is the sum of inmplicit and explicit costs know as?

A

Total economic costs

21
Q

Short-Run Costs

What are the short run costs?

A

Average and Marginal costs

22
Q

Short-Run Costs

What are average costs?

A

Costs per unit of output AC = TC / Q

23
Q

Short-Run Costs

What are marginal costs?

A

Is the increase in total cost of producing an extra unit of output. MC = ΔTC / ΔQ

24
Q

Long Run Costs

What is the cost affected by in the long run?

A

All of the factors of production are increased in order to increase output.

25
Q

Long Run Costs

What is the shape of the long run average cost curve (LRAC)?

A

‘Envelope’ curve, i.e. it envelops an infinite number of short-run average cost (SRAC) curves

26
Q

Long Run Costs

What is the long run average total cost curve? (LRATC)

A

Curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm’s inputs are variable.

27
Q

Long Run Costs

Why do the SRAC curves keep moving right?

A

There is more output produced

28
Q

Long Run Costs

Why is the LRAC a U shaped curve?

A

Due to economies and diseconomies of scale

29
Q

Economies of Scale

What are economies of scale?

A

Decreases in the average costs of production over the long run as a firm increases all of its inputs

30
Q

Economies of Scale

How do economies of scale explain downward sloping curve of LRAC?

A

As output increases, and a firm increases all inputs, average cost, or cost per unit of output, falls.

31
Q

Economies of Scale

What are examples of economies of scale?

A

-Specialization of labor
-Specialization of management
-Bulk buying
-Financing economies

32
Q

Diseconomies of Scale

What are diseconomies of scale?

A

Increases in long-run average costs that come about when a firm increases its factors of production in order to increase its scale of output

33
Q

Diseconomies of Scale

How do diseconomies of scale explain upward sloping curve of LRAC?

A

As a firm increases its scale of production, costs per unit of output increase

34
Q

Diseconomies of Scale

What are examples of diseconomies of scale?

A

-Coordination and monitoring difficulties
-Communication difficulties
-Poor work motivation

35
Q

Profits

What is the equation for economic profit?

A

Economic profit = total revenue – economic costs = total revenue – the sum of explicit costs + implicit costs

36
Q

Profits

What is normal profit?

A

Occurs when economic profit is equal to zero, and TR = TC.

37
Q

Profits

What is abnormal profit?

A

Occurs when TR > TC.

38
Q

Profits

What are losses?

A

Occurs when TR < TC.

39
Q

Profit-Maximization

What is profit maximization?

A

Determining the level of output that the firm should produce to make profit as large as possible.

40
Q

Profit-Maximization

Where is profit maximization occured?

A

When MC=MR

41
Q

Profit-Maximization

What happens when the AC curve is below, on, and over the AR?

A

Below=profit
On=normal
Over=loss

Economics Chapter 7 (2 decks)

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