Lecture 21: Intro and cost curves Flashcards
How businesses behave depends on what?
The conditions in the market they supply
What are the conditions that businesses in the markets they supply?
- how many similar products are there
- is the entry easy or difficult
- are competitor’s products identical or just similar
What is a perfect substitute?
when the competitor’s products are identical
What is an imperfect substitute?
When the competitor’s products are similar but not identical
What is industrial organisation?
the study of how forms reacts to these and other market conditions
Describe a highly competitive market
many suppliers
low barriers to entry
zero economic profit in the long run
What are the two types of highly competitive markets and what type of product do you have in these markets?
- perfect competition if it is a homogenous product
- monopolistic competition if it is differentiated product
Describe a less competitive market
- difficult entry
- potential long run profitability
In perfect competition, Price =
Marginal cost
What are the two types of less competitive markets? Describe these markets
monopoly- one supplier, no good substitutes
oligopoly - few suppliers, same or close substitutes
Describe a market with perfect competition
highly competitive many suppliers low barriers to entry zero economic profit in the long run a homogenous product
Describe a market with monopolistic competition
highly competitive many suppliers low barriers to entry zero economic profit in the long run differentiated product
Describe a monopoly
- less competitive markets
- difficult entry
- potential long run profitability
- one supplier, no good substitutes
Describe an oligopoly
- less competitive markets
- difficult entry
- potential long run profitability
- few suppliers, same or close substitutes
What is zero economic profit?
normal level of profit
Define total revenue
the amount a firm receives for it’s sale of a product
Define total cost
the amount a firm pays for inputs into production
What is the equation for maximum profit?
π(q) = TR (q) - TC (q)
Define accounting profit
the firm’s total revenue minus the firm’s explicit cost
Define economic profit
total revenue minus opportunity cost, including both explicit and implicit costs
Accounting profit can be
economic loss
A firm’s cost of production includes all the
opportunity costs of making its output of goods and services
The opportunity cost of using a resource is
the value of the next-highest values alternative use of that resource
Define explicit costs
input costs that require direct outlay of money by the firm (resources that you use and pay for with money)
Define implicit costs
input costs that do not require an outlay of money by the firm (resources that you do not pay for with money)
What three things does quantity of output depend on?
- produced inputs such as factory equipment
- labour
- natural resources or raw materials
What does a production function show?
a technical relationship: the output obtainable from any combination of inputs
Define short run
sufficiently short so that at least one input cannot be varied, ie. is fixed
Define the long run
sufficiently long so that all inputs can be varied
Define the very long run
sufficiently long that the technical relationship, f, changes
Define marginal product
the marginal product of any input in the production process is the increase in output that arises from an additional unit of that input
What is diminishing marginal product?
the marginal product of an input declines as the quantity of the input increases
What is the law of diminishing marginal product/diminishing marginal returns?
The marginal product of an input declines as the quantity of the input increases.
Does the LoDMR apply in the long or short run?
in the short run where at least one input is constant.
