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FInal Exam Flashcards

1
Q

What is a firm

A

institution that hires factors of production and organizes them to produce and sell goods and services

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2
Q

Firm’s goals

A

maximize profit (total revenue - total cost)

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3
Q

Difference between economic profit and accounting profit

A

Economic profit is total revenue - opportunity cost (explicit + implicit costs) -> forgone wages, interest, rent, etc.

Accounting profit is total revenue - explicit costs (out of pocket expenses like wages, rent)

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4
Q

what is capital

A

assets/resources used to produce goods and services

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5
Q

what is labor

A

human effort or work contributed to production of goods and services

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6
Q

difference between technological and economic efficiency

A

technological efficiency occurs when firm uses least number of inputs to produce given output

economic efficiency occurs when firm produces given quantity of output at least cost

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7
Q

how do firms organize

A

command system and incentive system

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8
Q

command system

A

uses mangerial hierarchy

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9
Q

incentive system

A

uses market like mechanism to induce workers

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10
Q

principal agent problem

A

problem of devising compensation rules that induce an agent to act in best interest of principal

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11
Q

Ownership types

A

proprietorship
partnership
corporation

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12
Q

proprietorship

A

single owner, unlimited liability, profits taxed as income

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13
Q

partnership

A

2 or more people, must agree on profit distribution and hierarchy

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14
Q

corporation

A

owned by stockholders with limited liability, profit taxed twice

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15
Q

perfect competition

A

many firms and buyers
all firms sell same product
no restriction on entry of new firms
both firms and buyers are well informed about prices and products

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16
Q

monopolistic

A

many firms
similar but slightly different
each firm posseses element of market power
no restriction on entry

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17
Q

oligopoly

A

small number of firms
might produce almost identical or differentiated products
barriers to entry

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18
Q

monopoly

A

one firm
no close substitutes
barriers to entry

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19
Q

short run

A
  • quantity of 1 or more resources used in production is fixed
  • most firms have capital fixed in short run
  • other resources can be changed in short run
  • easily reversed
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20
Q

long run

A
  • quantities of all resources can be varied
  • not easily reversed
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21
Q

total product

A

total output in each period

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22
Q

marginal product

A

change in total product that results from one unit increase in quantity of labor employed

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23
Q

average product

A

total product/quantity of labor

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24
Q

diminishing marginal returns

A

eventually marginal product of worker is less than previous worker

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25
total cost
cost of all resources used TFC + TVC
26
Curve of TFC, TVC, and TC
TC increases as output increases TVC increases as output increases TFC is always the same
27
Marginal cost curve
falls as output increases over output range with increasing marginal returns rises as output increases over output range with diminishing marginal returns
28
ATC, AFC, and AVC
ATC = AFC + AVC ATC is U shaped AVC upward sloping AFC downward sloping
29
long run average cost curve
all inputs are variable and all costs are variable
30
Price taker
firm that can't influence price of good or service must "take" equilibrium market price
31
what decision do firms in perfect competition face?
1. how to produce at minimum cost 2. what quantity to produce at 3. whether to enter or exit a market
32
Shutdown point
price and quantity at which it is indifferent between producing profit maximizing quantity and shutting down MC curve intersects with AVC curve
33
when should firm shut down
if price falls below average variable cost
34
when should firms exit
when they incur economic loss
35
long run equilibrium
firms enter market if profits exist, increasing supply and reducing prices until profits are zero firms exit if losses exist, decreasing supply and raising prices until losses are eliminated
36
what is efficiency in context of perfect competition
price of good = marginal cost of production goods are produced at lowest possible cost
37
Barriers to entry in monopoly
natural, ownership, legal
38
natural monopoly
economies of scale enable one firm to supply entire market at lowest possible cost
39
ownership barrier
one firm owns significant portion of key resource
40
what decisions do monopolies face
must choose appropriate price
41
Price discrimination
selling different units for different prices
42
how does a monopoly price discriminate
1. identify and separate different buyer types 2. sell product that can't be resold
43
Pros and cons of price discrimination
Pros: lower prices for some consumers, improved efficiency, encourages innovation Cons: exploitation of consumers, discrimination based on vulnerability, market inefficiency
44
Perfect price discrimination
occurs if firm can sell each unit of output for highest price someone is willing to pay
45
how does quantity from monopolist differ from that of perfect competition
monopolist produces lower quantity than would be produced under perfect competition
46
Efficiency in monopoly
how effectively resources are allocated and whether total welfare in market is maximized
47
What does a monopoly typically result in
deadweight loss because some consumers who would be willing to pay more than marginal cost are priced out of market, and inefficiency due to market power
48
what is rent seeking
pursuit of wealth by capturing economic rent (any surplus) pursue goals by buying or renting monopolies
49
product differentiation
firms produce goods that are similar but not identical to their competititors products are distinct in some way either through design, quality, features, branding, customer service, or other attributes
50
how do firms in monopolistic competition compete
compete on product quality, price, and marketing
51
short run profit maximization (monopolistic competition)
produce where MR = MC, price is set based on demand economic profit occurs if price > ATC
52
long run outcome
new firms enter if profit exists, reducing demand for each firm until price equals ATC
53
long run equilibrium
firms operate with excess capacity and positive markup downward sloping demand curve
54
excess capacity
produces less than quantity at which ATC is minimum
55
Markup
amount where price is greater than marginal cost
56
goal of advertising
to shrink markup
57
signal
action taken by informed person or firm to send message to uninformed people
58
cartel
group of firms acting together to limit output, raise price, and increase profit illegal!
59
collusion
agreement between 2 or more firms to restrict output, raise price, and increase profit illegal in US, often done in secret
60
game theory
tool for studying strategic behavior in oligopolies; actions of one firm can directly affect outcomes of others
61
Rules, strategies, payoffs, outcome
rule: how game is played strategies: what can players do Payoffs: reward for actions Outcome: what happens when game is played
62
nash equilibrium
both players choose the action that is best for them rational
63
how can you punish within a game
tit-for-tat strategy, one player cooperates if other cooperates, or cheats if other cheats trigger strategy, cooperates if other cooperates, but nash equilibrium forever thereafter if player cheats
64
does punishing have real world consequences
price wars may result where there is an additional complication (uncertainty about changes in demand)
65
how is repeated game different from one-off game
firms play multiple times and care about future outcomes, so more likely to cooperate in repeated games one-off games they only decide once, focusing on short term gains, leading to more competititon and less cooperation

Hon 202 (3 decks)

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