CHAPTER SIX –SELLERS AND INCENTIVES Flashcards
Which three conditions characterize perfectly competitive markets?
- No buyer or seller is big enough to influence the market price
- Sellers in the market produce identical goods
- There is free entry and exit in the market
What are the three elements of the sellers problem?
- Making the goods
- The cost of doing business
- The reward of doing business
Whats the formula of marginal cost?
Marginal cost = change in total cost / change in output
Whats the price elasticity of supply & whats the formula of it?
The price elasticity of supply is the measure of how responsive quantity supplied is to price changes. It can be calculate with the following formula: Pirce elasticity of supply (εP) = Percentage change in quantity supplied / Percentage change in price
Whats the long run supply curve?
The long-run supply is the supply of goods available when all inputs are variable. It means that in the long run, all property, plant, and equipment expenditure is variable. Furthermore, in the long run, the number of producers in the market is not fixed. Therefore, new firms will enter the market if there are economic profits, and some firms will leave the market if they are experiencing an economic loss.
Whats the average total cost & whats the formula of it?
The average total cost (ATC) is the total cost divided by the total output
Whats a shutdown?
Shutdown is a short-run decision to not produce anything during a specific period. This could happen if
the MR < MC. Indeed, the firm would only lose money without having any benefits.
Whats a producers surplus?
Producer surplus is the difference between how much a person would be willing to accept for given quantity of a good versus how much they can receive by selling the good at the market price. The difference or surplus amount is the benefit the producer receives for selling the good in the market
Whats the variable factor of production?
Variable factors are those that do change with output, which means more are employed when production increases, and less when production decreases. Typical variable factors include labour, energy, and raw materials directly used in production
Whats the fixed factor of production?
Fixed factors are those that do not change as output is increased or decreased, and typically include premises such as its offices and factories, and capital equipment such as machinery and computer systems
What is referred to as short run?
Period of time where some of the firm’s inputs cannot be
changed
➢ In the short run, you can’t buy another oven
What is referred to as a long run?
Period of time where all of the firm’s inputs can be changed
➢ In the long run, you can buy another oven, even build
another kitchen
What is the law of diminishing returns?
Eventually, marginal product falls = law of diminishing returns • At some point, each additional worker contributes less output than the worker before • Why? Production can lead to bottlenecks because capital is fixed—workers are waiting for machinery to become open, etc.
What is variable cost?
Variable Cost: Cost associated with variable factors of
production. Variable costs change as the level of output
changes.
What is fixed cost?
Fixed Cost: Cost associated with the fixed factor of
production. Fixed costs do not change as output changes.
How do you calculate the marginal cost?
Marginal cost (MC) = additional cost of producing one more output unit (= derivative of the cost function) Example: C(q) = 20q² + 500 → MC(q) = 40q
How do you calculate Profit?
Profit = Total Revenue – Total Costs
Total Revenue = P x Q
Total Costs = ATC x Q
ATC = Total of all production costs, divided by the amount of output produced.
Profit = (P x Q) – (ATC x Q) = (P – ATC) x Q
Calculate total profit
P = $1.13
Q = 1,225
ATC = $0.93
So, Profit = ($1.13 – 0.93) x 1,225
= $245
What question does the price elasticity of supply answer?
How responsive producers are to
changes in the market price
Elasticity of supply will be greater:
Elasticity of supply will be greater: • The more inventory the firm has • The more easily the firm can hire workers • The longer the time horizon
Whats a producer surplus?
The difference between the price the firm would be willing to accept and the market price The difference between the market price and the supply curve
The supply curve reflects a willingness to…
The supply curve reflects a willingness to sell a
good or service at various price levels.
An optimizing seller makes decisions at the…
An optimizing seller makes decisions at the
margin.
The supply curve reflects a willingness to…
The supply curve reflects a willingness to sell a
good or service at various price levels.
