LM 1: The Firm & Market Structures Flashcards
In a perfectly competitive market, what do the Marginal Revenue (Demand Curve) and the Total Revenue (TR) look like?
the marginal curve is flat = price for each unit produced
total return curve increases a a proportionate rate as quantity increases
In an imperfectly competitive firm, what does the demand curve vs the marginal revenue, and the total return look like?
demand curve slopes down as quantity increases because they have pricing power.
total return takes the shape of an arch because the benefits of selling at a lower price disappear beyond a certain point.
What shape does short-term marginal cost (SMC), average variable cost (AVC), and average total cost (ATC) take and why?
start out high and then fall before raising again as output increases
In a perfectly competitive market, what determines price?
price = average renenue = marginal revenue
In an imperfect competitive market (monopoly), what determines price and what does the marginal revenue look like?
price = average revenue
marginal revenue = downward slope, starts at same point as demand curve but decreases faster.
Where in a perfect or imperfect competition, how does a firm maximize profits?
by setting production quantity (Q) at the point where marginal revenue equals short term marginal cost (MR = SMC)
Where on a graph is the break-even point and the shutdown point?
breakeven point: SMC crosses ATC (total revenue = total cost)
shutdown point: SMC crosses AVC
If total revenue(TR) exceeds total cost (TC) what should a firm do in the short run decision and long term decision?
TR > TC
short run: stay in market
long run: stay in market
If total cost (TC) exceeds total return (TR) which exceeds the total variable cost (TVC) what should a firm do in the short run decision and long term decision?
TC> TR> TVC
short - run: stay in market
long- run: exit market
If total variable cost exceeds total revenue what should a firm do in the short-term and long term?
TVC > TR
short-run: shut down production
long run: exit market
What is the short-run average total cost curve (SRATC) composed of?
curve defines the per unit cost in the short run
What is the long-run average total cost (LRATC) composed of?
curve tangent to different SRATC periods.
What is economies of scale vs diseconomies of scale?
economies of scale: the cost advantages a company gains with the increase in production. occurs because production costs can be spread over a large number of goods
diseconomies of scale: when a company or business grows so large that the costs per unit increase
What is the minimum efficient scale (MES), what does it mean, and what must a firm do when it reaches the minimum efficient scale (MES)?
low point on the LRATC where a company doesn’t benefit from economies of scale or doesn’t get hurt from diseconomies of scale.
firm must operate to minimize its cost per unit.
What does accounting profit consist of?
economic profit and normal profit.
What are 4 market structures economists classify? PMOM
- perfect competition
- monopolistic competition
- oligopoly
- monopoly