Econ Exam 3 April Flashcards
What is one assumption we make about companies?
the primary goal of the firm is to maximize profits
What is the profit equation?
Total Revenue-Total Costs = Profit
Total Cost Equation
Total Variable Costs (TVC) + Total Fixed Costs (TFC)
What was the color of the sky on march 11th?
BLACK
Variable Costs
costs of production that change w/changes in the level of output
What is the best example of variable costs?
Labor
Fixed Costs
Fixed costs are sunk costs. Once they are incurred, there is nothing the firm can do to avoid them, even if the firm shuts down.
What is the best example of fixed costs?
Building Cost
Movie theater example of fixed costs
Movie theater “buys” movie for week, if they are closed, there is no variable cost (labor) but cost for building & movie are fixed.
What do we assume about variable and fixed costs in this class?
Always assume that everything is either all variable or all fixed, even though in real life partially fixed/variable things do occur.
Average Cost
a per unit cost for a given level of output
Average Cost Chant
Average ________ is total ______ divided by quantity.
Average Total Cost equation
ATC = TC/Q
Average Fixed Cost Equation
AFC = TFC/Q
Average Variable Cost Equation
AVC = TVC/Q
Marginal Cost
The extra cost of adding one more unit of output
Marginal Cost Equation
MC = Delta TC/Delta Q
Why does marginal cost shoot through the roof?
MPPl is shrinking due to the law of diminishing returns. Must be short run because capital is fixed.
Why does MC go down before it goes up?
MPPl is increasing bc more workers means they will be more productive due to division/specialization of labor.
Why does the TVC go up by the same each time?
Add workers at the same cost per worker, and each worker costs the company the same amount (Paid same, use same materials)
Where do the AVC and ATC cross the MC?
at their lowest points
What does the AFC look like?
It keeps decreasing
Demand Curve Facing the Firm (DFF)
the amount of its own product it can sell at all alternative prices, c.p.
What is an example of a DFF?
The demand curve for one book by one author on Amazon at different prices
What is the shape of the DFF determined by?
The shape of the DFF will be determined by the industry structure
What are the 4 types of industry structures?
Perfect competition, monopoly, monopolistic competition, oligopoly
What 2 industry structures are complete opposites?
Perfect competition and monopoly
Does perfect competition exist in the real world?
No, it would require an infinite number of firms
What is a monopoly?
Only one firm, zero competitors, existence is illegal
What Assumptions do we make about perfect competition?
1) Many firms ( none have mrkt pwr, so all are price takers)
2) Homogeneous Product
3) Economic Agents are Rational
4) Economic Agents have perfect mobility (no barriers to entry)
5) No artificial constraints on price ( no price ceilings, gov interference etc.)
What is a price taker?
No market power, no control over price
What is the closest thing to perfect competition?
Farming
What are barriers to entry?
Things that prevent firms from entering the market. They do no exist in perfect competition. Everyone can get in or out.
What are artificial constraints on price?
Price ceilings, gov interference, outside influences,
What are prices determined by in perfectly competitive markets?
They are determined 100% by supply and demand. The equilibrium price is the price
Why is the DFF curve perfectly straight?
Due to 1st assumption, because there are an infinite number of firms
What does TR look like in a perfectly competitive market?
Straight line out of the origin
What does the MR look like in a perfectly competitive market?
MR=AR=DFF=P
New Golden Rule
profits will be maximized at the quantity where marginal revenue equals marginal cost. ( MR=MC)
