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EC201 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

What is industrial organization?

A

the study of how firm’s decisions about prices and quantities depend on the market conditions they face

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2
Q

What is the definition Total Revenue?

A

the amount a firm receives for the sale of its output

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3
Q

What is the math equation for Total Revenue?

A

TR = (quantity of output)(price)

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4
Q

What is Total Cost?

A

TC: the market value of the inputs a firm uses in production

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5
Q

How is Profit calculated?

A

Profit = Total Revenue - Total Cost

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6
Q

What are Explicit Costs?

A

input costs that require an outlay of money by the firm

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7
Q

What are Implicit Costs?

A

input costs that do not require an outlay of money by the firm

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8
Q

What is Economic Profit?

A

Total Revenue - Total Cost, includes both explicit and implicit costs

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9
Q

What is Accounting Profit?

A

Total Revenue - Total Explicit Cost

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10
Q

Why is Accounting Profit usually larger than Economic Profit?

A

Because Accounting Profit ignores implicit costs

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11
Q

What is the Production Function?

A

the relationship between quantity of inputs used to make a good and the quantity of output of that good

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12
Q

What is Marginal Product?

A

the increase in output that arises from an additional unit of cost

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13
Q

What is Diminishing marginal product?

A

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

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14
Q

What are Fixed Costs?

A

FC, costs that do not vary with the quantity of output produced

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15
Q

What are Variable Costs?

A

VC, costs that vary with the quantity of output produced

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16
Q

How are Total Costs calculated with variable and fixed costs?

A
  • Total cost = Fixed costs + variable costs

- TC = FC + VC

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17
Q

What are Average Total Costs and how are they calculated?

A
  • total cost / quantity of output
  • ATC = Average Fixed Cost + Average Variable Cost
  • ATC = Total Cost / Quantity
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18
Q

What are Average Fixed Costs?

A
  • Fixed Cost / quantity of output

- AFC = FC / Q

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19
Q

What are Average Variable Costs?

A
  • variable cost / quantity of output

- AVC = TC / Q

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20
Q

What is Marginal Cost?

A

the increase in total cost that arises from an extra unit of production

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21
Q

How is Marginal Cost calculated?

A
  • MC = change in total cost / change in quantity

- MC = ΔTC / ΔQ

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22
Q

What are 3 features of cost curves that are typical of many firms?

A

1) Marginal cost rises with the quantity of input
2) The average-total-cost curve is U-shaped
3) The marginal-cost-curve crosses the average-total-cost curve at the minimum of average total cost

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23
Q

What is the efficient scale?

A
  • the quantity of output that minimizes average total cost

- bottom of the U on average total cost curve

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24
Q

What is the relationship between Marginal Cost and Average Total Cost?

A
  • If Marginal Cost > Average Total Cost, Average Total Cost is rising
  • If Marginal Cost
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25
Q

What is Economies of Scale?

A

the property whereby long-run average total cost falls as the quantity of output increases

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26
Q

How do Economies of Scale often arise?

A

Often arise because higher production levels allow specialization of workers

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27
Q

What are Diseconomies of Scale?

A

the property whereby long-run average total cost rises as the quantity of output increases

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28
Q

How do Diseconomies of Scale often arise?

A

Often arise because the more stretched the management team becomes, the less effective they are keeping costs down

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29
Q

What is Constant returns to scale?

A

the property whereby long-run average total cost stays the same as the quantity of output changes

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30
Q

What curve is Marginal Cost the slope of?

A

the total cost curve

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31
Q

How are fixed costs and marginal costs related?

A

No relationship

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32
Q

How are marginal cost and marginal product related?

A

inverse relationship

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33
Q

If Marginal Cost > Average Total cost:

A
  • Average Total Cost is rising

- Average Variable Cost is rising

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34
Q

If Marginal Cost

A

Average Total Cost declining

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35
Q

If Marginal Cost

A

Average Variable Cost is declining

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36
Q

If Marginal Cost = Average Total Cost:

A

Average Total Cost is at minimum

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37
Q

What does Average Fixed Cost always do with an increase in output?

A

Always declines with an increase in output

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38
Q

What is market power?

A

if a firm can influence the market price of the good it sells

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39
Q

What is a competitive market?

A

a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker

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40
Q

What is a price taker?

A

Buyers and sellers must accept the price determines

41
Q

What are the 2 main characteristics of a competitive market?

A

1) There are many buyers and sellers in the market

2) The goods offered by the various sellers are largely the same

42
Q

What is a 3rd optional but important characteristic of a competitive market?

A

firms can freely enter or exit a market

43
Q

What is Average Revenue?

A
  • total revenue / quantity

- Average revenue always equals the price of the good

44
Q

What is Marginal Revenue and how is it calculated?

A
  • the change in total revenue from an additional unit sold

- MR = ΔTR / ΔQ

45
Q

When does marginal revenue equal the price of a good?

A

for competitive firms

46
Q

What are the 3 rules of profit maximization?

A

1) If marginal revenue if greater than marginal cost, the firm should increase its output
2) If marginal cost is greater than marginal revenue, the firm should decrease its output
3) At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal

47
Q

What is a shutdown?

A

refers to a short-run decision not to produce anything during a specific period of time because of current market conditions

48
Q

What is an exit?

A

refers to long-run decision to leave the market

49
Q

What is the difference between a shutdown and an exit in terms of cost?

A
  • Firm that shuts down temporarily still has to pay its fixed costs
  • Firm that exits the market does not have to pay any costs at all
50
Q

When does a firm shut down in the short term?

A
  • The firm shuts down if the revenue that it would earn from producing is less than its variable costs of production
51
Q

When does a firm shut down in the short term in terms of math?

A

Shut down if:

1) TR less than TC
2) TR / Q less than VC / Q
3) P less than AVC

52
Q

What is a competitive firm’s short-run supply curve?

A

the portion of its marginal cost curve that lies above average variable cost

53
Q

What is a sunk cost?

A

a cost that has already been committed and cannot be recovered

54
Q

What is a firms long run decision to enter or exit a market?

A

The firm exits the market if the revenue it would get from producing is less than its total costs

55
Q

What is a firms long run decision to enter or exit a market in terms of math?

A 
Exit if:
1) TR less than  ATC
2) TR / Q less than TC / Q
3) P less than ATC
Enter if:
1) P greater than ATC
56
Q

What is a competitive firm’s long run supply curve?

A

the portion of its marginal cost curve that lies above average total cost

57
Q

What is another way to write the Profit equation?

A

(P - ATC) x Q

58
Q

In the long-run equilibrium of a competitive market with free entry and exit what must a firm be doing?

A

operating at their efficient scale

59
Q

What happens with profit in the zero-profit equilibrium?

A

economic profit is zero but accounting profit is positive

60
Q

Why is the long-run supply curve typically more elastic than the short-run supply curve?

A

Because more firms can enter and exit more easily in the long-run than in the short run

61
Q

What is the definition of a monopoly?

A

a firm that is the sole seller of a product without close substitutes

62
Q

What is the fundamental cause of monopolies?

A

barriers to entry

63
Q

What are the 3 main barriers to entry?

A

1) Monopoly resources : key resource owned by single firm
2) Government regulation: legal right to a monopoly
3) the production process: can produce a good at a lower cost than can a large number of producers

64
Q

What is a natural monopoly?

A

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could 2 or more firms

65
Q

What is the key difference between a competitive firm and monopolistic firm?

A

monopoly’s ability to influence the price of its output

66
Q

What is the output effect in a monopoly?

A

more output is sold, so Q is higher, which tends to increase total revenue

67
Q

What is the price effect in a monopoly?

A

the price falls, so P is lower, which tends to decrease total revenue

68
Q

What is price discrimination?

A

the business practice of selling the same good at different prices to different customers

69
Q

What shape is a monopoly’s demand curve?

A

downward sloping

70
Q

How do you maximizing profit in a monopoly on a graph?

A

choose the quantity at which marginal revenue equals marginal cost. Then use the demand curve to find the price that will induce customers to buy that quantity

71
Q

How is a monopolist’s profit maximizing quantity of output determined?

A

The monopolist’s profit maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve

72
Q

How is the price equation of a good affected by a monopoly?

A

P > MR = MC

73
Q

What are welfare economics?

A

the study of how the allocation of resources affects economic well-being

74
Q

What is willingness to pay?

A

the max amount that a buyer will pay for a good

75
Q

What is consumer surplus?

A

the amount a buyer is willing to pay for a good minus the amount the buyer actually paid for a good

76
Q

How is consumer surplus measured on a graph?

A

The area below the demand curve and above the price measures the consumer surplus in the market

77
Q

What is cost?

A

the value of everything a seller must give up to produce a good

78
Q

What is producer surplus?

A

the amount a seller is paid for a good minus the seller’s cost of providing it

79
Q

How is producer surplus measured on a graph?

A

The area below the price and above the supply curve measures the producer surplus in a market

80
Q

What is Efficiency?

A

the property of resource allocation of maximizing the total surplus received by all members of society

81
Q

What is Total Surplus?

A

1) consumer surplus + producer surplus

2) TS = Value to buyers - Cost to sellers

82
Q

What is Equality?

A

the property of distributing economic prosperity uniformly among the members of society

83
Q

What are 3 insights about market outcomes?

A

1) Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay
2) Free markets allocate the demand for goods to the sellers who can produce them at the lowest cost
3) Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus

84
Q

What is the only monopoly in the US?

A

Paper Collar Industry

85
Q

What is the market demand curve for a good equal to in a monopoly?

A

the firm’s average revenue curve

86
Q

In a monopoly, what should a firm do if Marginal Revenue > Marginal Cost?

A

expand

87
Q

In a monopoly, what should a firm do if Marginal Revenue is less than Marginal Cost?

A

contract

88
Q

What is the markup price equation?

A

(marginal cost)(markup) = Price

89
Q

What is markup equal to in the markup price equation?

A

Ed/Ed - 1 (Ed = price elasticity)

90
Q

What are the 2 principles of Markup pricing?

A

1) the higher the Elasticity, the lower the markup

2) the lower the Elasticity, the higher the markup

91
Q

What is an oligopoly?

A

a market structure in which only a few sellers offer similar products or identical products

92
Q

What is game theory?

A

the study of how people behave in strategic situations

93
Q

What is collusion?

A

an agreement among firms in a market about quantities to produce or prices to charge

94
Q

What is a cartel?

A

a group of firms acting in unison

95
Q

What is a Nash equilibrium?

A

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

96
Q

How do firms in an oligopoly maximize profit?

A

they produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price (which equals marginal cost)

97
Q

What happens as more and more sellers enter an oligopoly?

A

an oligopolistic market looks more and more like a competitive market. The price approaches marginal cost and the quantity produced approaches the socially efficient level

98
Q

What is prisoner’s dilemma?

A

a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

99
Q

What is dominant strategy?

A

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

EC201 (6 decks)

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