ECON 200 Final Review Flashcards
For a competitive firm to maximize profits…
Price = marginal cost
Or price = cost/marginal product
For a monopolist to maximize profits…
marginal revenue = marginal cost
For a firm to stay in business in the short run…
The firm’s revenue must be greater than (cover) their variable costs.
What is the formula for the discount factor? (delta)
1/(1+r)
Where r is the interest rate
What assumptions must be met for the Coase Theorem to be true?
There must be
a) zero or VERY low transaction costs
b) clearly defined property rights
Marginal Cost
Change in total cost from producing 1 more unit of output
Value of marginal product
The marginal product (in units of output) x the per unit output price
E.g. MP = 4 & item can be sold for $2 each then the VMP is $8
What are three reasons for the high degree of specialized/division of labor?
1) Specialization increases the dexterity or skill through repetition.
2) Time is saved by not passing from one task to another
3) Specialization facilitates the invention of machines to take over the routine tasks performed by labor
Comparative Advantage
When a producer can produce a good with a lower opportunity cost of production than another.
What is a production function?
A mathematic function that measures the maximum amount of output that can be produced by a given combination of inputs.
How do you know if a firm is operating efficiently?
The firm must be operating according to it’s cost and production function.
Marginal Product
Additional output that is created when an additional (one more) unit of an input is employed.
Diminishing marginal productivity
As one input of production is added to a fixed amount of other inputs after some point, the marginal product of the variable input continually diminishes.
Diminishing returns at the intensive margin
When more of identical units of a productive input are added to a fixed amount of other factors of production, the amount by which the input increases output becomes smaller and smaller.
Diminishing returns at the extensive margin
The phenomenon that when industries expand, eventually the ability to replicate the productive process decreases, as firms must use inputs that are less and less efficient.
Economic Efficiency
The exhaustion of mutual benefits. When it is impossible to make anyone better off without making someone worse off.
Coase Theorem
The proposition that in the absence of transaction costs, that is, with clearly delineated property rights, the assignment of liability to damages created by one individual will not prevent the exhaustion of mutual benefits, though the incomes of the parties involved will be affected.
Pareto Efficient or Pareto Optimal
When all mutual benefits are exhausted; the situation where it is impossible to someone better off without making someone worse off.
Total product
The amount of output that factors of production create.
Tragedy of the commons
The inefficient allocation that occurs because common ownership does not provide adequate incentive for individuals to bear the full opportunity costs of their decisions
Should you shut down in the short run?
The firm should continue to operate in the short run if total revenue at least covers your variable costs. If the incoming revenue does not even cover the variable costs then you should shut down straight away.
Should you shut down in the long run?
You should shut down in the long run if... total cost (fixed + variable) > total revenue
A firm should continue to employ workers (or other units) up to the point where…
Value of marginal product = input price
What are solutions to the Bertrand paradox?
1) Product differentiation
2) Binding capacity constraints
3) Repeated game
