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Econ 251 > Chapter 8 > Flashcards

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=

A

PQ-C

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?

A

No

25
Q

Mon: How does the monopolist choose between price and quantity?

A

it can only choose 1

26
Q

The Patent System

A

gives the inventor of a new product the exclusive right to sell the product for a given period time

27
Q

Profit Formula

A

PQ-C(Q)

28
Q

Why do PC firms continue to produce in the long-run?

A

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
Q

How are PC products viewed?

A

as perfect substitutes

30
Q

Mon: Having Two Firms in an Industry Leads to Losses but

A

but a single firm can earn positive profits because it has higher volume and enjoys reduced average costs due to economies of scale

31
Q

TC=

A

AC x Q

32
Q

Two Ways to Address Loss in a Monopoly

A
  • bring cost down

- expand demand

33
Q

3 ways to have Monopoly

A

1) patent
2) Ownership of Key Resources
3) Economies of Scale

34
Q

Natural Monopoly

A

monopoly that results from economies of scale

35
Q

How is the long-run situation in perfect competition?

A

-just enough to cover the average cost of production

36
Q

Marginal Revenue for a Monopolist

A

P(1+E/E)

37
Q

Profits of a Monopolist

A

Revenue: R(Q)-C(Q)

Econ 251 (14 decks)

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