Midterm 3 Flashcards
Total revenue
The amount a firm receives for the sale of its output
Total cost
The market value of the inputs a firm uses in production
Profit
Total revenue - total cost
Explicit costs
Input costs that require an outlay of money by the firm
Implicit costs
Input costs that do not require an outlay of money by the firm
An important implicit cost
Opportunity cost of the financial capital that has been invested
Economic profit
Total revenue minus total cost, including both explicit and implicit costs
Accounting profit
Total revenue-total explicit cost
- usually larger than economic profit
Production function
The relationship between quantity of inputs used to make a good and the quantity of output of that good
Marginal product
The increase in output the arises from an additional unit of input
Diminishing marginal product
The property whereby the marginal product of an input declines as the quantity of the input increases
The total cost curve gets steeper as
The amount produced rises
In the production function it gets flatter as
Production rises
Fixed costs
Costs that do not vary with the quantity of output produced
Variable costs
Costs that vary with the quantity of output produced
Average total cost
Total cost divided by the quantity of output
TC/Q
AVC + AFC
Average fixed cost
- declines as output rises
Fixed cost/quantity
Average variable cost
- rises as output is increased
Variable cost/quantity
Marginal cost
The increase in total cost that arises from an extra unit of production
Change in total cost/change in quantity
Efficient scale
The quantity of output that minimizes average total cost
Shape of the average total cost curve
U shaped
Where does the marginal cost curve cross the average total cost curve?
At the minimum of the average total cost curve
Which average total curve is flatter?
The long run
Where do shore run curves lie
On or above long run
Economies of scale
The property whereby long run average total cost FALLS as the quantity of output increase
Diseconomies of scale
The property whereby long run average total cost RISES as the quantity of output increases
Constant returns to scale
Long run average total cost rises as the quantity of output changes
Competitive market
Many buyers and many sellers and goods offered by the various sellers are largely the same
Does a single buyer have a huge effect on the market?
No
Characteristics of a competitive market
Firms can freely enter or exit the market
Firms try to maximize profit
Revenue
Price times quantity
Marginal revenue
Change in total revenue/ change in quantity
Average revenue
Total revenue/quantity sold
Change in profit
Marginal revenue - marginal cost
Marginal cost curve
Upward sloping
Crosses average total cost curve at the minimum of average total cost
If marginal revenue is greater than marginal cost, the firm should
Increase output
If marginal cost is greater than marginal revenue the firm should
Decrease output
At profit maximizing level, marginal revenue and marginal cost are
Exactly equal
Shut down
A short run decision to not produce anything during a specific time period bc of current market conditions
Exit
Long run decision to leave the market
Total revenue less than variable cost
Shut down
Total revenue/quantity is less than variable cost/quantity
Shut down
Price less than average variable cost
Shut down
Sunk cost
A cost that has already been committed and cannot be recovered
- should ignore them bc nothing can be done
Total revenue less than total cost
Exit
Total revenue/quantity is less than total cost/quantity
Exit
Price less than average total cost
Exit
Price is greater than average total cost
Enter
Profit equations
Total revenue-total cost
(Total revenue/quantity - total cost/quantity) times quantity
(Price - average total cost) times quantity
When does the process of entry and exit ends only when
The price and average total cost are driven to equality
Firms can enter and exit more easily in the
Long run
The long run supply curve is _______ than the short run supply curve
typically more elastic
Monopoly
A firm is the sole seller of its product and the product does not have close subsitutes
3 sources of barriers to entry
- A key resource is owned by a single firm
- Government gives the single firm exclusive rights
- The single firm can produce at a lower cost than other firms
Natural monopoly
When a single firm can supply a good or service to an entire market at a lower cost than could two or more firms
- distribution of water
Difference between competition and monopoly is
The monopoly’s ability to influence the price of its output
Competitive market demand curve
Horizontal line
Monopoly’s demand curve
Downward sloping
Average revenue in a monopoly is always equal to
The price of the good
A monopolists marginal revenue is always less than
The price of the good
A monopoly’s marginal revenue curve is
Below its demand curve
Where is the monopolists profit maximizing quantity
The intersection of the marginal revenue curve and the marginal cost curve
Do monopoly’s have supply curves?
No
From owners standpoint monopoly is
Desirable
The socially efficient quantity if found where
The demand curve and the marginal cost curve intersect
Monopolists produce _____ than the socially efficient quantity of output
Less
Inefficiency of monopoly is measured with
The deadweight loss triangle
Total surplus lost bc of monopoly pricing
Area between demand curve and marginal cost curve
In taxes, government gets profits. In monopolies, _____ gets profits
Firms
Is monopoly profit a social problem
No
When do problems in monopolies occur?
When firms produce/sell a quantity below the level that maximizes total surplus
price discrimination
The business practice of selling the same good at different price to different customers
- only exists in monopolies
Public policies towards monopolies
- Governments can try to make industries more competitive
- Regulate behavior of monopolies
- Turning some monopolies into public enterprises
- Do nothing at all
Industrial organization
The study of how firms decisions about prices and quantities depend on the market conditions they face
Marginal cost and marginal product have an
Inverse relationship
How to find total cost from ATC
ATC times Q
** trick question economies of scale deal with what
AVERAGE total cost
If average variable cost is the same everywhere then
AVC = MC
when a firm is operating at an efficient scale the ______ is minimized
ATC
What things are equal in a perfectly competitive market
Demand = market price = MR = average revenue
Graph of one firm in a perfectly competitive market
Marginal cost (upward sloping) Average total cost curve
The lowest price you can accept in a competitive firm is the
Minimum average variable cost
Price > ATC > AVC
Good
Making profit
ATC > Price > AVC
- losing money
SR: stay open
LR: exit
ATC > AVC > Price
SR: shut down
LR: exit
Profit is maximized where
MR = MC
In a monopoly what is equal
Price = average revenue
Price > MR = MC
Maximizing its profits?
MR=MC
In perfect price discrimination CS and DWL are equal to
Zero
Biggest problem with monopolies
Deadweight loss
