ECON: Chapter 8 Flashcards
What changes when the number of firms in a market change? Explain.
– When new firms enter, the supply will shift to the right: Price
decreases… and economic profit will decrease.
– When firms exit, the supply will shift to the left: Price increases… and
the economic profit will increase.
What concept can be used to describe LRAC?
The LRAC is an opportunity set, it separates what is attainable by the firm and what is not attainable.
What term can be used to describe the points on the LRAC?
The points on the LRAC are efficient because they maximize the firm’s resources.
What kind of efficiency do firms aim for in the long term? What do each of these mean?
Firms aim to be both technically efficient and economically efficient in the long term. Technically efficient means that the produced the maximum outputs with the inputs (resources) that they have available to them. When a firm is economically efficient it means that they produce a given amount of output at the lowest cost.
Explain why: A firm that is Economically efficient must be Technically
efficient. However, a firm that is technically efficient may not be economically
efficient.
A firm that is Economically efficient must be Technically
efficient. However, a firm that is technically efficient may not be economically efficient because if you produce your products at the lowest possible cost you are by default producing producing the most products you can. (Assuming you are spending all your money on producing.)
What does SRATC stand for?
Short run average total cost curve.
What does LRAC stand for?
Long run average cost curve.
What is the cost minimization condition?
For a firm to maximize its profit, it needs to reduce its cost as much as possible (For a given level of service).
In what way are firms “free” in the long term?
In the long term capital is not fixed so firms can decide to exit the market or new firms will decide to enter the market.
What do economists say about the first section of the LRAC curve? What does this mean?
Economists say that the fist portion of the LRAC usually decreases at first. Economists say that in the first portion, there is increasing return to scale. This is because the cost of producing more units, decreases so the profit is increasing.
What does the middle of the LRAC curve look like? What do economists say about the middle section of the LRAC curve? What does this mean?
The middle of the LRAC curve is flat. Economists say that the middle of the LRAC curve has a constant return. This means that as I increase the amount of units, the cost to produce them does not increase.
What does the last section of the LRAC curve look like? What do economists say about this section of the LRAC curve? What does this mean?
The last section of the LRAC curve is going up. This means that as the firm produces more units, it costs them more to produce them. Economists call this decreasing return to scale.
What do economists call the point where the LRAC curve starts to have a constant return?
The beginning of the constant return is called the minimum efficient scale.
What points on the LRAC curve are attainable? Which ones are efficient?
The points on and above the LRAC curve are attainable. The most efficient points are on the LRAC curve. (Not the SRATC curve.)
What makes up the LRAC curve? What does the LRAC curve show?
The long run average cost curve is made up of mini short run total cost curves. The long run average cost curve shows the most efficient points.
