Lecture 21: Intro and cost curves

Question 1

How businesses behave depends on what?

Answer 1

The conditions in the market they supply

Question 2

What are the conditions that businesses in the markets they supply?

Answer 2

• how many similar products are there
• is the entry easy or difficult
• are competitor’s products identical or just similar

Question 3

What is a perfect substitute?

Answer 3

when the competitor’s products are identical

Question 4

What is an imperfect substitute?

Answer 4

When the competitor’s products are similar but not identical

Question 5

What is industrial organisation?

Answer 5

the study of how forms reacts to these and other market conditions

Question 6

Describe a highly competitive market

Answer 6

many suppliers
low barriers to entry
zero economic profit in the long run

Question 7

What are the two types of highly competitive markets and what type of product do you have in these markets?

Answer 7

• perfect competition if it is a homogenous product

- monopolistic competition if it is differentiated product

Question 8

Describe a less competitive market

Answer 8

• difficult entry

- potential long run profitability

Question 9

In perfect competition, Price =

Answer 9

Marginal cost

Question 10

What are the two types of less competitive markets? Describe these markets

Answer 10

monopoly- one supplier, no good substitutes

oligopoly - few suppliers, same or close substitutes

Question 11

Describe a market with perfect competition

Answer 11

highly competitive
many suppliers
low barriers to entry
zero economic profit in the long run
a homogenous product

Question 12

Describe a market with monopolistic competition

Answer 12

highly competitive
many suppliers
low barriers to entry
zero economic profit in the long run
differentiated product

Question 13

Describe a monopoly

Answer 13

• less competitive markets
• difficult entry
• potential long run profitability
• one supplier, no good substitutes

Question 14

Describe an oligopoly

Answer 14

• less competitive markets
• difficult entry
• potential long run profitability
• few suppliers, same or close substitutes

Question 15

What is zero economic profit?

Answer 15

normal level of profit

Question 16

Define total revenue

Answer 16

the amount a firm receives for it’s sale of a product

Question 17

Define total cost

Answer 17

the amount a firm pays for inputs into production

Question 18

What is the equation for maximum profit?

Answer 18

π(q) = TR (q) - TC (q)

Question 19

Define accounting profit

Answer 19

the firm’s total revenue minus the firm’s explicit cost

Question 20

Define economic profit

Answer 20

total revenue minus opportunity cost, including both explicit and implicit costs

Question 21

Accounting profit can be

Answer 21

economic loss

Question 22

A firm’s cost of production includes all the

Answer 22

opportunity costs of making its output of goods and services

Question 23

The opportunity cost of using a resource is

Answer 23

the value of the next-highest values alternative use of that resource

Question 24

Define explicit costs

Answer 24

input costs that require direct outlay of money by the firm (resources that you use and pay for with money)

Question 25

Define implicit costs

Answer 25

input costs that do not require an outlay of money by the firm (resources that you do not pay for with money)

Question 26

What three things does quantity of output depend on?

Answer 26

• produced inputs such as factory equipment
• labour
• natural resources or raw materials

Question 27

What does a production function show?

Answer 27

a technical relationship: the output obtainable from any combination of inputs

Question 28

Define short run

Answer 28

sufficiently short so that at least one input cannot be varied, ie. is fixed

Question 29

Define the long run

Answer 29

sufficiently long so that all inputs can be varied

Question 30

Define the very long run

Answer 30

sufficiently long that the technical relationship, f, changes

Question 31

Define marginal product

Answer 31

the marginal product of any input in the production process is the increase in output that arises from an additional unit of that input

Question 32

What is diminishing marginal product?

Answer 32

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

Question 33

What is the law of diminishing marginal product/diminishing marginal returns?

Answer 33

The marginal product of an input declines as the quantity of the input increases.

Question 34

Does the LoDMR apply in the long or short run?

Answer 34

in the short run where at least one input is constant.