séance 4 Flashcards
MC intersects AC and AVC at…
their minimum
TF: AC curve lies below the AVC curve
F: AVC lies below AC
when MC>AC, AC decreases or increases? economies or diseconomies of scale?
AC increases: diseconomies of scale
definition of diseconomies of scale?
when the average cost goes up as output (q) goes up
definition of economies of scale?
whent the average cost goes down as output goes up
AC is at its minimum when…
MC=AC
are short-run costs or long-run costs larger?
short-run costs are larger
when considering shutting down in the long term, should you consider fixed costs?
no - behave as if there aren’t any
when consider starting an activity, should you consider fixed costs?
yes
does the long-run costs curve lie above or below the short-run costs curve? and why?
it lies below the short-run costs curve because more time = more options = more freedom to choose the cheapest way to reach a given lvl of output (q)
revenue is maximized when. demand is…
when demand is unit elastic
what is the profit maximization condition?
MR(q)=MC(q)
how to compute profit?
profit = R(q)-C(q)
accounting profit = …
accounting profit = revenue - accounting costs
why is accounting profit an incomplete tool for decision making?
because it doesn’t take into account opportunity costs
economic profit = …
economic profit = revenue - economic costs (accounting costs + opportunity costs - sunk costs)
what should be ignored when making business decisions?
sunk costs
are accounting profits or economic profits better to make a decision?
economic profits
to increase revenue, should a seller increase or decrease price when demand is elastic?
decrease price
to increase revenue, should a seller increase or decrease price when demand is inelastic?
increase price
when making a business decision, should opportunity costs be taken into account?
yes, they are the next best thing you can do with your money
if MR(q)>MC(q), what can the firm do to increase profit?
it can produce one more unit and increase its profit (not a maximized profit amount of q yet)
if MC(q)>MR(q), what can the firm do to increase its profit?
reduce its output (q is not a profit-maximizing output level)
what is the definition of a perfectly competitive market?
A perfectly competitive environment is a situation where all firms are price takers.
what does being a price taker mean?
a firm is a price taker if it has no influence over the market price and thus takes the price as given
a firm in a perfectly competitive market faces elastic or inelastic demand?
elastic demand: cannot set price too high (customers will go buy from competitors) or too low (firm suffer losses)
do firms have market power in a perfectly competitive market?
no because they are price takers
what are the 5 conditions for a perfect competition market?
- large nb of firms and customers
- perfectly informed firms and customers (price and product quality)
- homogeneous products (perceived to be identical)
- free entry (low set up/fixed costs) and exit on the market
- no transaction costs
why is free entry an important condition of perfect competition market?
because it ensures a large nb of firms
what is the relation between MR and P under perfect competition?
MR=P
in perfect competition, profit is maximized if …
P=MC (because MR=MC and P=MR)
when profit<0, when should a firm shut down in the short-run
if revenue doesn’t cover variable cost (VC)
a firm should stay in business in the short run if…
R>VC
P>AVC
when deciding if shutting down in the short-run, what costs shouldn’t be taken into account ?
fixed costs should not be taken into account in the short-run because they are sunk
is the short-run, can a firm decide to sill operate even if profits are negative?
yes, as long as you don’t fall under the shutdown price
in the short run, what is the breakeven point equal to? what can we say about profit at that point?
the breakeven price is the price at which you make 0 profit, but still operate.
breakeven price = min AC(q*)
in the short run, what is the shutdown point equal to? what can we say about profit at that point?
the shutdown price is the price at which you shut down and profit is negative
shutdown price = min AVC
in the short-run, what happens to the firm if P
the firm shuts down (q=0)
the short-run supply curve of a firm in a perfectly competitive market coincides with…
coincides with the portion of its marginal costs curve that lies above the average cost curve
the short-run market supply curve is equal to…
the horizontal sum of individual firms’ supply curves (like the demand)
the price elasticity of supply represents what?
it represents the percentage change in supply when P goes up by 1%
what is the difference between price elasticity of supply and price elasticity of demand?
price elasticity of demand is negative for most goods (demand goes down as price goes up) but price elasticity od demand is positive for most goods (higher selling price motivates producers to supply more output to the market)
should fixed cost be taken into account when making business decisions in the long run?
yes because fixed costs are not sunk in the long run
when should you make the decision of shutting down in the long run?
when revenue doesn’t cover total costs (R
in the LR, what can we say about the breakeven and shutdown point?
breakeven point = shutdown point = min AC
a firms long-run supply curve is…
the portion of the MC curve that lies above the AC curve
when do firms enter and exit the market?
they enter when it is profitable and exit when it isn’t
why is perfect competition good for customers?
they get goods at the lowest price
why is perfect competition not good for firms?
the long run profit = 0
the LR supply curve is perfectly… at P=….
the LR supply curve is perfectly elastic at P=min AC
what do we say about firms profit in the LR?
in the LR, firms make zero economic profit (normal profit)
TF: making zero economic profit means you are not making any money
F: it simply means the owner could have done just as well in a different activity
what can we say about the demand curve of a firm in a perfectly competitive market?
A firm in a perfectly competitive market faces a perfectly elastic demand curve
A firm in a perfectly competitive market maximizes profits when …
P=MC
The short run supply curve of a firm in a perfectly competitive market coincides with…
with the portion of its MC curve that lies above AVC
The long run supply curve of a firm in a perfectly competitive market is… with …
The long run supply curve of a firm in a perfectly competitive market is perfectly elastic with P=min AC
in the LR, if profit is positive, what happens to firms?
if profit>0, P>minAC = firms enter the market = price goes down until P=min AC, profit = 0
