Chapter 8 Flashcards

1
Q

Optimization Criterion

A

Marginal Revenue=Marginal Cost

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2
Q

P=

A

a-bQ

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3
Q

MR=

A

a-2bQ

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4
Q

Perfect Competitive Market

A
A
market in which
(1) there are many
buyers and sellers;
(2) each firm
produces a
homogeneous
product; (3)
buyers and sellers
have perfect
information; (4)
there are no
transaction costs;
and (5) there is
free entry and exit
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5
Q

PC: firm demand

curve

A
The demand curve
for an individual
firm’s product; in
a perfectly
competitive
market, it is
simply the market
price
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6
Q

marginal revenue

A
The change in
revenue
attributable to the
last unit of output;
for a competitive
firm, 
MR
is the
market price.
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7
Q

Perfectly Competitive Firm’s Demand(what are the 3 things the line equals)

A
The demand curve for a competitive firm’s product is a horizontal line at the market price. This
price is the competitive firm’s marginal revenue.
D
f
=
P
=
MR
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8
Q

Perfectly Competitive Output Rule(general guideline and give the range where it happens)

A

To
maximize profits, a perfectly competitive firm produces the output at which price
equals marginal cost in the range over which marginal cost is increasing:
P=MC(Q)

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9
Q

Short-Run Output Decision under Perfect Competition(the one with the greater than less than or equal to sign)

A
To
 maximize short-run profits, a perfectly competitive firm should produce in the range of
increasing marginal cost where 
P=MC,
provided that P
>
AVC.
If 
P
<
AVC,
the firm
should shut down its plant to minimize its losses.
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10
Q

PC: The Firm’s Short-Run Supply Curve

A

The short-run supply curve for a perfectly competitive firm is its marginal cost curve above
the minimum point on the
AVC
curve,

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11
Q

Long-Run Competitive Equilibrium

A
In the long run, perfectly competitive firms produce a level of output such that
1.
P
=
MC
2.
P
=
minimum of
AC
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12
Q

Example of Perfect Competition

A
  • Agriculture
  • software packages
  • memory chips
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13
Q

PC: Demand at the Market and Firm Levels

A
  • price is determined by the interaction of buyers and sellers in the market…intersection of the supply and demand curve
  • individual firm is small relative to the market, it has no perceptible influence on the market price
  • if the firms charged a price even slightly above the market price it would sell nothing
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14
Q

PC:Maximizing Profits happens when?

A

slope of the cost curve(marginal cost)= slope of the revenue curve(marginal revenue)

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15
Q

How is maximizing adjusted for PC?

A

its P=MC because

because p=mr

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16
Q

Whats true about the price exceeding average variable cost?

A

each unit sold generates more revenue than the cost per unit of the variable inputs

17
Q

When price is below average variable cost?

A

the firm losses less by shutting down

18
Q

Profit=

19
Q

PC Short Run Maximization on a graph

A

the greatest distance between revenue and cost

20
Q

PC: The Decision to Shut Down losses equal what

A

the fixed costs of production

21
Q

PC: More on Long Run Competitive Equilibrium

A
  • firms are earning zero economic profits;

- there is no way to produce the output at a lower economic cost

22
Q

Does a monopoly have to be large?

A

No. you can have a single gas station or movie theater

-it doesn’t just have to be one large firm

23
Q

Mon: What equal what on the graph?

A

market demand=firm’s product demand

24
Q

Do monopoly’s have unlimited power?

25
Mon: How does the monopolist choose between price and quantity?
it can only choose 1
26
The Patent System
gives the inventor of a new product the exclusive right to sell the product for a given period time
27
Profit Formula
PQ-C(Q)
28
Why do PC firms continue to produce in the long-run?
zero economic profits imply that accounting profits are just high enough to offset any implicit costs of production -the firm earns no more and no less than it could earn by using the resources in some other capacity
29
How are PC products viewed?
as perfect substitutes
30
Mon: Having Two Firms in an Industry Leads to Losses but
but a single firm can earn positive profits because it has higher volume and enjoys reduced average costs due to economies of scale
31
TC=
AC x Q
32
Two Ways to Address Loss in a Monopoly
- bring cost down | - expand demand
33
3 ways to have Monopoly
1) patent 2) Ownership of Key Resources 3) Economies of Scale
34
Natural Monopoly
monopoly that results from economies of scale
35
How is the long-run situation in perfect competition?
-just enough to cover the average cost of production
36
Marginal Revenue for a Monopolist
P(1+E/E)
37
Profits of a Monopolist
Revenue: R(Q)-C(Q)