Comepetitve Markets

Question 1

Total Revenue

Answer 1

The amount a firm receives for the sale of an output

Question 2

Total Cost

Answer 2

The amount a firm pays to buy the inputs into production.

Question 3

Profit

Answer 3

Profit = Total Revenue - Total Cost

Question 4

Costs as Opportunity Cosrs

Answer 4

A firm’s cost of production includes all opportunity costs of making its output of goods and services.

A firm’s cost of production include explicit costs and implicit costs.

Question 5

The Production Function

Answer 5

The production function shows the relationship between quantity of inputs used to make and god and the quantity of output of that good.

Question 6

Marginal Product

Answer 6

The marginal product of any input in the production process is the addition to output that arises from an additional unit of that input.

Question 7

Diminishing Marginal Product

Answer 7

Diminishing marginal product is the property whereby the marginal product of an input declines as the quantity of the input increases.

Question 8

Fixed Costs

Answer 8

Those costs that do not vary with the quantity of the product produced.

Question 9

Variable Costs

Answer 9

Those costs that do vary with the quantity of output produced.

Question 10

Average Costs

Answer 10

Average costs can be determined by dividing the firm’s costs by the quantity of output it produces.
The average cost is the cost of each typical unit product.

Question 11

Marginal Cost

Answer 11

Marginal cost (MC) measures the increase in total cost that arises from an extra unit of production.
Marginal cost helps to answer the question, how much does it cost to produce an additional unit of output

Question 12

Decision Rule for a Consumer

Answer 12

•Marginal private benefit = Marginal private cost
•
MPB = the additional private value of one more unit of a
good/service consumed

• MPC = the additional private cost of acquiring one more unit of
a good/service

Question 13

Decision Rule for a Producer

Answer 13

DECISION RULE FOR A PRODUCER
• Marginal private benefit = Marginal private cost

• MPB = the additional private value of one more unit of a
good/service sold

• MPC = the additional private cost of producing one more unit
of a good/service

Question 14

Decision Rule for Society

Answer 14

• Marginal social benefit = Marginal social cost

• MSB = the additional total value to society of one more unit of
a good/service

• MSC = the additional total cost to society of producing one
more unit of a good/service

Question 15

Principle of Marginal Analysis

Answer 15

•If MR > MC, the extra revenue from selling one more
unit exceeds the extra cost. The firm should increase output to increase profit

•If MR < MC, the extra revenue from selling one more
unit is less than the extra cost.
–The firm should decrease output to increase profit
•If MR = MC economic profit is maximised.

Question 16

Theory of the Firm: Key Concept

Answer 16

THEORY OF THE FIRM: KEY CONCEPTS
• Production
• Cost
• Revenue
• Profit

Question 17

Marginal Product

Answer 17

The marginal product of any input in the production process is
the addition to output that arises from an additional unit of
that input.

Question 18

Average Costs

Answer 18

• Average costs can be determined by dividing the firm’s costs by
the quantity of output it produces.

• The average cost is the cost of each typical unit of product.

Question 19

Profit and Loss in the Short Run

Answer 19

•At short‐run equilibrium firms may:
–Earn a profit
–Break even
–Incur an economic loss.

Question 20

Determining Profit/Loss

Answer 20

•If price equals average total cost a firm breaks even.
•If price exceeds average total cost, a firm makes economic
profit.
•If price is less than average total cost, a firm incurs an economic
loss.

Question 21

Competitive Firms and Zero Profit

Answer 21

• Profit equals total revenue minus total cost.
• Total cost includes all the opportunity costs of the firm.
• In the zero‐profit equilibrium, the firm’s revenue compensates
the owners for the time and money they expend to keep the
business going.

Question 22

Benefits of Competition

Answer 22

Profits are Maximised
Costs are Minimised
Zero Profits

Question 23

Characteristics of a Perfectly Competiitve Market

Answer 23

There are many buyers and sellers in the market.

The goods offered by the various sellers are largely the same; homogenous.

Firms can freely enter or exit the market; no barriers to entry.

Each firm acts as a price taker with MR = P

Question 24

Perfectly Competitive Markerts: Short Run vs Long Run

Answer 24

In the short-run, firms choose output where P = MR = MC and may break-even, make positive economic profit or even a loss depending on how P compares with ATC at profit maximizing quantity.

In the long run, entry/exit ensures that all firms make zero economic profit; P = Min ATC ; Firms operate at efficient scale

Question 25

Distinguish between Short run and Long Run

Answer 25

The short run refers to a period of time when at least one factor is fixed, not to a specific calendar time. It can vary in length of time, depending on the industry. For example, the building on a new factory cannot be achieved overnight if you wished to establish a steel manufacturing plant, whereas a dog walking service can beestablished almost overnight.The long run refers to a period of time in which thequantities of all inputs can be varied.