Final Exam Flashcards
cost that requires an outlay of money
explicit cost
cost measured by value in dollar terms of benefits that are forgone
implicit cost
explicit cost + implicit cost
opportunity/economic cost
revenue - explicit cost
accounting profit
revenue - economic cost
economic profit
economic profit is usually … than accounting profit
less
total value of assets owned by an individual or firm
capital
opportunity cost of the use of one’s own capital, income earned if the capital had been used in the next-best alternative use
implicit cost of capital
when making an either-or choice between two activities, choose the choice…
with positive economic profit
additional cost incurred by producing one more unit of a good or servivce
marginal cost
when each additional unit costs more to produce than the previous one
increasing marginal cost
when each additional unit costs the same to produce as the previous one
constant marginal cost
quantity that generates the highest possible total profit
optimal quantity
when making a profit-maximizing how much decision, optimal quantity is..
the largest quantity at which marginal benefits are greater than or equal to marginal costs
cost that has already been incurred and is nonrecoverable, should be ignored in decisions about future actions
sunk cost
profit=
revenue - cost
if the marginal cost is positive, total costs are…
increasing
if the marginal benefit is positive, total benefits are…
increasing
when profit is more than 0, resources move…
into the industry
when profits are equal to 0, resources…
do not move
when profits are less than 0, resources move…
out of the industry
what do time horizons determine
choices available for firms
quantity of an input is fixed, at least one input is fixed
short run
inputs can vary over time, all inputs can be varied
long run
inputs that do not change, given quantity
fixed inputs
inputs whose quantity change, affects the amount of output
variable inputs
change in total output as you change variable factor by one
marginal product
declining marginal product due to an increase in the variable factor
diminishing returns
marginal costs are found by…
change in total costs/change in output
average costs are found by…
total costs/quantity
lowest average costs at which you are able to product the quantity with varying inputs
long run average costs
what does economics of scale cause
average long run costs decline, hit minimum, then increase
relationship between the quantity of inputs a firm uses and the quantity of output it produces
production function
shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input
total product curve
cost that does not depend on the quantity of an output produced, cost of fixed input
fixed cost
cost that depends on the quantity of output produced, cost of variable input
variable cost
total cost is the sum of
fixed costs and variable costs
total cost per output unit
average (total) cost
how is average (total) cost found
total cost/quantity
fixed cost per unit of output
average fixed cost
how is average fixed cost found
fixed cost/quantity
variable cost per unit of output
average variable cost
how is average variable cost found
variable cost/quantity
quantity of output at which average total cost is lowest
minimum-cost output
relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output
long-run average total cost curve
long-run average total cost declines as output increases
increasing returns to scale
long-run average total cost increases as output increases
decreasing returns to scale
long-run average total cost is constant as output increases
constant returns to scale
minimum of quantities of scale, lowest long run average costs
minimum efficient scale
market in which all market participants are price-takers
perfectly competitive market
producers whose actions have no effect on the market price of the good or service it sells
price-taking producers
consumer whose actions have no effect on the market price of the good or service they buy
price-taking consumer
perfect competition- firm condition
many producers, none of whom have a large market share
fraction of the total industry output accounted for by that producer’s output
market share
perfect competition- product condition
every firm produces a standardized product
when consumers regard the product of different producers as the same good
standardized product/commodity
perfect competition- entry and exit condition
there are no obstacles to free entry and exit
when new producers can easily enter into an industry and existing producers can easily leave that industry
free entry and exit
industry that only has one good which has no close substitutes
monopoly
ability of a firm to raise prices above the competitive level by reducing output
market power
something that prevents other firms from entering the industry
barriers to entry
type of barrier to entry, one firm controls a specific input
control of a scarce resource or input
type of barrier to entry, existing and larger firms have lower costs
increasing returns to scale
type of barrier to entry, one firm is more advanced than the others
technological superiority
type of barrier to entry, value of a good or service to an individual is greater when many people use the same good or service
network externality
type of barrier to entry, patents and copyrights
government-created barriers
gives an inventor a temporary monopoly in the use of sale of an invention
patent
gives the creator of a literary or artistic work the sole right to profit from that work
copyright
when no one firm has a monopoly so they must compete, but producers still have some market power and can affect prices
imperfect competition
when sellers cooperate to raise their joint profits instead of competing
collusion
collusion is a key to which market structure
oligopoly
profit is maximized by producing quantity of output where MR=MC
optimal output rule
profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost, P=MC
price-taking firm’s optimal output rule
market price where a price-taking firm’s profit is zero
break-even price
for price-taking firms, when the market price is greater than the minimum average total cost the firm is
profitable
for price-taking firms, when the market price is less than the minimum average total cost the firm is
unprofitable
for price-taking firms, when the market price is equal to the minimum average total cost the firm is
breaks even
a firm should cease production when price falls below the minimum average variable cost
shut-down rule
price at which firms cease production in the short run
shut-down price
when price lies between the minimum average total cost and minimum average variable cost, the firm…
produces in the short run to minimize loss
what are the two short run dimensions
number of firms, closeness of goods
what is the one long run dimension
conditions of entry and exit
perfect competition- market power condition
no market power
monopolistic competition- firm condition
large amount of firms
monopolistic competition- product condition
differentiated products
monopolistic competition- market power condition
small amount of market power
monopolistic competition- entry and exit condition
very low barriers, free entry and exit
oligopoly- firm condition
few large firms
oligopoly- product condition
identical or differentiated products
oligopoly- market power condition
lots of market power, mutual interdependence, collusion
oligopoly- entry and exit condition
significant barriers to new firms
monopoly- firm condition
one firm
monopoly- product condition
single product with no substitutes
monopoly- market power condition
considerable market power
monopoly- entry and exit condition
blocked by barriers that prevent new firms, no entry
what is the elasticity of perfect competition
perfectly elastic
in perfect competition, marginal revenue and market price are
equal
in perfect competition, when profits are more than 0 the firm should
produce Q*
in perfect competition, when profits are equal to 0 the firm should
produce Q*
in perfect competition, when profit are less than 0 the firm should
pick the decision that minimizes the losses
if the supply goes down, the price and profit
go up
if the supply goes up, the price and profit
go down
what is the long run outcome for profit in perfect competition
zero profit
what is the efficiency of perfect competition
effient
when does producing instead of shutting down minimize costs
when the profit of producing Q* is greater than the variable costs
in monopolistic competition, oligopoly, and monopoly how do marginal revenue and price compare
marginal revenue is less than price
how does product differentiation affect advertising
more differentiation=more advertising
when one more unit is sold, there is an increase in revenue by price
quantity effect in monopoly
in order to sell last unit, market price must be cut down for all units
price effect in monopoly
at low levels of output in monopoly, the quantity effect is…
stronger than the price effect
at high levels of output in monopoly, the price effect is…
stronger than the quantity effect
when MR is greater than MC, increase profit by
producing more
when MR is less than MC, increase profit by
producing less
when economies of scale provide a large cost advantage to a single firm that produces all of an industry’s output
natural monopoly
good is supplied by the government, set prices based on efficiency, have high cost and low quality
public ownership
government limiting the firms by limiting the price that can be charged
regulation
long run equilibrium for perfect competition
profits=0
why are monopolies not efficient
deadweight loss to society, ATC is not minimum
monopolists can earn profits in
the short and long runs
charging different prices to different consumers in order to increase profits
price discrimination
when the pricing and production decisions of one firm significantly affect the profits of its rivals
interdependence
firms cooperating to raise their joint profits
collusion
agreement among several producers to obey output restrictions and increase their joint profits
cartel
when firms ignore the effects of their actions on each others’ profits
noncooperative behavior
when firms limit production and raise prices in a way that raises one another’s profits even though there is not a formal agreement
tacit collusion
what are the ways products are differentiated
style/type, location, quality
producing less than the output at which average total cost is minimized
excess capacity
conditions for price discrimination to hold
must separate the groups, must prevent resale of product
charging everyone the amount that they are willing to pay, supplier gets all consumer surplus
perfect price discrimination
