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EC 260 > Lesson 2.1 > Flashcards

Lesson 2.1 Flashcards

1
Q

what does market structure affect and how do we define markets?

A

affects pricing power of firm so we define markets based on their degree of pricing power

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2
Q

5 factors market structure is determined by?

A

of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition

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3
Q

4 main types of markets

A

perfect competition, monopolistic competition, monopoly, oligopoly

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4
Q

of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of Perfect Competition Market

A

many # of firms present; standardized product, no power over price, low barrier to entry, no nonprice competition, ex. some agricultural sectors

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5
Q

of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of Monopolistic Competition market

A

many # of firms present, differentiated product, some power over price, low barrier to entry, nonprice competition: advertising and product differentiation, example: retail trade

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6
Q

of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of oligopoly market

A

few # of firms present; standardized or differentiated product, some power over price, high barriers to entry, nonprice competition: advertising and product differentiation, example: computers, oil, steel

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7
Q

of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of monopoly market

A

one firm present, unique product, considerable power over price, very high barriers to entry, nonprice competition: advertising, example; public utilities

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8
Q

how do firms in the absence of market power maximize profit?

A

they cannot influence demand through advertising or product differentiation so they maximize profit by minimizing cost, through the efficient use of resources and by determining the quantity to produce

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9
Q

how is market price determined in perfect competition

A

intersection of supply and demand

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10
Q

demand curve of individual firms in perfect competition and why?

A

horizontal demand curve - if one firm alters output, there will be virtually no effect on market price

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11
Q

what is one factor that causes supply to increase?

A

advanced in tech

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12
Q

what is one factor that causes supply to decrease?

A

increased input prices

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13
Q

where is profit maximized?

A

vertical largest distance between TR and TC, where TR - TC is largest, where MR/P = MC, with MC increasing

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14
Q

what happens when MR > MC

A

revenue from addition unit is greater than MC so firm should increase production

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15
Q

what happens when MR < MC

A

revenue from additional unit is less than MC so firm should decrease production

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16
Q

MR curve graph explained with dollars/unit output and output

A

horizontal (firm demand curve)

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17
Q

will a firm in perfect competition market earn positive profit where P = MC?

A

not necessarily

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18
Q

MRP definition

A

amount of an additional unit of variable input adds to firm’s TR

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19
Q

Marginal Expenditure definition

A

amount of an additional unit of labour adds to firm’s TC

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20
Q

formula for MRP

A

dTR / dL = MR * MP

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21
Q

formula for ME

A

dTC / dL = MC * MP

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22
Q

where are profits maximized with MRP and ME

A

where MRP = ME OR where P = Price of variable / MP variable

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23
Q

when should a firm produce and explain profit at this point

A

if ATC - AFC (AVC) < P, produce at a level of output where MC = P, even if this results in negative profit. profit will exceed that which would result from shutting down?

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24
Q

what is the shut down point

A

P = minimum AVC (AVC = MC)

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25
Q

what happens at shut down point?

A

manager loses money equal to FC if he produces or loses that money if he shuts down, should shut down

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26
Q

define producer surplus

A

difference between market price and price producer is willing to receive for good/service (producer reservation price)

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27
Q

producer reservation price

A

MC of producing good/service

28
Q

what is the supply curve in equilibrium of a perfectly competitive market?

A

horizontal summation of competitive firm’s MC curves (horizontal summation of firm’s supply curves)

29
Q

producer surplus with supply (summation of MC curves) and demand curves?

A

area below where supply = demand and above supply curve

30
Q

Producer surplus with MC, ATC, AVC curve

A

area below where output = MC and above MC curve

31
Q

total revenue with MC, ATC, AVC curve

A

square where P = Q = MC to the origin

32
Q

total cost with with MC, ATC, AVC curve

A

square where P = Q = ATC to the origin

33
Q

profit of firm with with MC, ATC, AVC curve

A

TR - TC = square where P = MC = Q to where P = Q = ATC

34
Q

define variable cost profit

A

profit of the firm before fixed costs

35
Q

in perfect competition, what do the firm’s supply curves represent?

A

MC curve

36
Q

consumer surplus with market supply and demand curves

A

triangle where P = Supply = Demand to above where market demand curve

37
Q

total surplus with market supply and demand curve

A

total area below market demand curve and above market supply curve = consumer surplus + producer surplus

38
Q

what is long run average total cost curve also called?

A

long run average cost curve

39
Q

in the long run what are costs?

A

variable

40
Q

what happens if Price > long run average cost

A

firms would earn positive economic profits and new firms would enter industry. the increase in supply would drive price and profits down

41
Q

what happens if price < long run average cost

A

firms would leave industry since profits would be negative and the supply would fall so market price and profits would rise

42
Q

in long run equilibrium, what will economic profits be?

A

0

43
Q

what is equilibrium in long run?

A

where profit = 0, and individual price = lowest point on long run average cost curve (individual Q); market price = long run MC and short run MC

44
Q

what happens in a constant cost industry?

A

input prices and technology do not change as firms enter or exit the industry.

45
Q

long run supply curve of constant cost industry

A

horizontal

46
Q

what happens in an increasing cost industry?

A

increase in output leads to an increase in input prices

47
Q

long run supply curve of increasing cost industry

A

upward-sloping

48
Q

long run supply curve of decreasing cost industry

A

downward-sloping

49
Q

allocation of resources in short run equilibrium if demand for corn increases and demand for rice decreases

A

price of corn will increase, quantity of corn produced will increase and corn producers will earn positive economic profits. price of rice will decrease, quantity of rice produced will decrease and rice producers will earn negative economic profits

50
Q

allocation of resources in long run equilibrium if demand for corn increases and demand for rice decreases

A

firms will reallocate resources away from production of rice and towards production of corn. price of corn will decrease from its high, quantity of corn produced will increase further, and corn producers will find that their economic profits decline to 0. price of rice will increase from its low, quantity of rice produced will increase from its low and rice producers will find that their economic profits rise to 0

51
Q

in short run and long run, where do producers produce?

A

short run where P = MC, long run where LRAC is at minimum

52
Q

formula for LRAC

A

LRTC / Q

53
Q

total surplus in a market is a measure of…

A

social welfare created by the market

54
Q

define barriers to entry

A

barriers that determine how easily firms can enter an industry, depending on market structure

55
Q

producer surplus formula

A

TR - TVC (variable cost profit)

56
Q

If a representative firm with total cost given by TC = 20 + 20q + 5q2 operates in a competitive industry where the short-run market demand and supply curves are given by QD = 1,400 – 40P and QS = –400 + 20P, the number of firms operating in the short run will
be:

A

find equilibrium Price, firms operate where P = MC and find Q each firm produces, then find equilibrium quantity to find total firms -> 200

57
Q

If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry:

A

there will be exit from the industry over time

58
Q

Meteor Tie Company produces ties from fabric according to Q = 10 + 4F – (1/3)F3. If fabric is free and ties sell for $20, what is Meteor’s optimal usage of fabric?

A

optimal use: profit maximization where d/dF of profit = 0 -> 2

59
Q

profit maximization using Price, Price of input and MP input

A

maximize profit where P * MP input = Price input

60
Q

what is long run firm output?

A

where LRAC is minimum

61
Q

what is long run market output?

A

market price substituted in demand equation

62
Q

what is long run market price?

A

set Price = SR firm MC = LR firm MC with LR firm output substituted

63
Q

what happens in decreasing cost industry?

A

input prices fall or technology improves as firms enter the industry.

64
Q

if demand of a product increases in a constant-cost industry:

A

short-run price goes up, but long-run price remains constant.

65
Q

The long-run supply curve for a product is horizontal with ATC = 200. Market demand is defined as P = 1,000 – 5Q. The market is competitive and is in long-run equilibrium with 40 firms in the industry. If a $50 tax is imposed on sellers, how many firms will be in the industry at the new long-run equilibrium?

A

37

EC 260 (11 decks)

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