Exam 3 Flashcards
What is Economic Profit
π = TR –TC
What is Total Cost
The cost incurred by the firm may be either explicit or implicit
What is Explicit Cost
An actual monetary payment, outlay, or an expense (for market-supplied resources)
What is Implicit Cost
The firm’s implicit cost is the return the firm’s resources could have earned elsewhere (normal profit)
What is an Accounting Profit
TR –Explicit Cost
What is the Profit Maximizing Output
MR = MC (or MR = SMC)
(P–ATC)×Q, if P > ATC, what happens?
The firm earns an economic profit.
(P–ATC)×Q, if P < ATC, what happens?
The firm is incurring an economic loss
(P–ATC)×Q, If P = ATC, what happens?
The firm breaks even.
What is Market Structure?
It is the characteristics of the economic environment in which the firm operates
What are the key factors in analyzing market structures
Number of firms, Type of products, Barriers to entry
What are the four main market structures?
Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly
What are the factors of Perfect Competition
Many firms Each firm sells a homogenous product No control over market price (firms are price takers) No barriers to entry/exit Perfect information
What is the demand curve facing each individual firm?
It is perfectly elastic
If the firm is a price taker then the demand function is what?
MR= change in TR divided by the change in Q which equals dTR divided by the dQ that = P
What is the firm’s shut down point
P= minimum AVC, (the firm’s shut-down point
What is the firm’s supply curve?
The upward-sloping portion of the firm’s SMC curve above minimum AVC is the firm’s supply curve.
Is it possible for perfect competition firms to have long run economic profts?
In the long run, economic profits are zero (due to no barriers to entry/exit)
Marginal Revenue Product (MRP)
MR * MP = P * MP
The profit-maximizing input level, L*, is found where?
MRP = w
The firm shuts down if?
w > ARP
ARP=?
ARP= TR/L= P * AP
What is Market Power?
Ability of a firm to raise its price without losing all sales
Which type of firms have Market Power
Monopolisitc firms and Monopoly firms.
What are the factors of a Monopoly?
1 single firm
barriers to entry (prohibitive)
no close substitutes
What are the factors of a Monopolistic Firm?
many firms
each firm is producing a differentiated product
low barriers to entry/exit (not prohibitive)
Marginal revenue is ______ as steep as the demand curve
Twice
MR=?
Change in TR over Change in Q is equal to dTR/dQ
Is there economic profit in the long run for monopolistic competition?
In monopolistic competition, in the long run, all economic profits are zero, due to competition from new firms P = ATC.
Is there economic profit in the long run for a monopoly?
In monopoly, economic profit is possible (but not guaranteed!) in the long-run.
