Final: Chapters 8, 9, 10, 11, 16, 18 Flashcards
Short run
Cannot modify anything except labor
Long-Run
Prices held constant, but you can modify anything else
Long-run Average total cost
Show’s the firms lowest cost per unit at each level of output
Short-Run average total cost
Average fixed cost and average variable cost
What is increasing economies of scale?
Production is most efficient here and is shows by the decrease in LRATC in beginning
What is constant returns to scale?
LRATC is constant/flat
What is decreasing returns to scale?
Production is inefficient because per unit costs are increasing. LRATC increasing
4 Characteristics of a perfectly competitive market
- Infinite buyers and sellers so they have no influence on market price
- Identical products
- Free entry and exit into and out of the market
- Perfect knowledge/information to all buyers and sellers
What is marginal revenue? Not formula but definition
Change in total revenue as a result of an additional unit sold of output
What is the goal of any firm?
To maximize profit, which occurs at MR(P)=MC
How can you tell if a firm is operating in the short-run or long-run??
If it is in the long run, then there is no fixed cost but at short run- there is a fixed cost, even at 0 quantity
In the short run, for a perfectly competitive market, when should a firm stay in business and when should they leave?
Should stay if MR > ATC or if MR=ATC (zero economic profit)
Should leave if ATC>MR
When will firms stop entering in the long-run of a perfectly competitive market?
Until every firm has zero economic profit
Characteristics of a monopoly
- The firm has market power on the price
- There is one seller
- The product is one without close substitutes
Why does a monopoly face a downward sloping demand?
As demand increases, price decreases
Why does marginal revenue go down twice as much as average revenue/demand in a monopoly?
The monopoly is giving up revenue on previous units sold
When should a firm produce in a monopoly?
If the MR > MC, firm should produce
How does a monopoly determine price?
Wherever, MC=MR(price), go up until the demand curve(WTP), and this is the price the monopoly will choose
Where is the profit in a monopoly?
The profit is between the max Willingness to pay and the average cost
What is bad about a monopoly?
Dead weight loss from restricted output
Does a monopoly produce at inelastic or elastic demand
Only if demand is elastic
What is price discrimination?
Different people pay a different price for the same good
Perfect price discrimination?
A firm will charge each unit of the good at a different price depending on what people are milling to pay
What is ordinary price discrimination?
Charging different customer groups different prices due to differences in elasticity of demand
Characteristics of an oligopoly
- Only a few sellers
- Selling identical or similar products
- prices are determined by each seller
- Can have cartels
When should a firm produce in an oligopoly?
If MR (Price) > MC
What is a dominant strategy in game theory?
A strategy consistently chosen by a firm regardless of the strategy chosen by the other
What is nash equilibrium?
When no firm has an incentive to deviate from its current strategy
Characteristics of a monopolistic competition? 4
- Many buyers and sellers that have market power
- Free entry and exit
- Perfect information
- Differential products
Why is a monopolistic competition inefficient?
Produces a dead weight loss
What does a tax wedge do? 2 things
Reduces producer and consumer surplus and creates a DWL
Why would there be a tax wedge? 2 things
Generates government revenue to finance their expenses
Decreases consumer consumption (ie. cigarettes)
How do Deadweight losses change depending if the market is elastic or inelastic?
Elastic- larger DWL (but same tax revenue)
Inelastic- Smaller DWL (but same tax revenue)
What is market failure?
A situation in which the free market, in the absence of government intervention, fails to achieve allocative efficiency
What can cause market failure?
Positive and negative externalities
What is an external cost?
Cost paid by bystanders, people other than consumers or producers
What is a social cost?
The cost to everyone, the price cost + external cost
What is a negative externality?
When a persons actions has adverse effects on another person (MCS > MCP)
What is a positive externality?
When a persons action has positive effects on another person (MBS > MBP)
Is there over or under production with a negative externality?
Overproduction
Is there over or under production with a positive externality?
Underproduction
How do you correct inefficiencies (DWL) in positive externality?
Subsidies
How do you correct inefficiencies (DWL) in negative externality?
Taxes
What is a public good?
Non-rivalrous + non-excludable
What is non-rivalrous?
If one person consumes the good, the amount available to others does not go down
What is non-excludable?
A good or service that we cannot prevent others from consuming
How much public goods should be provided?
When Marginal cost = the sum of all users marginal benefits of the good
