sellers and incentives Flashcards
conditions of a perfectly competitive market (3)
no buyer or seller in the market is big enough to influence the market
sellers in the market produce identical goods
there is free entry and exist into the market
seller’s problem steps
turning inputs into outputs
costs of production
revenue
short run
period of time when some of the firm’s input can’t be changed (variables)
long run
period of time when all firm’s inputs can ve changed (fixed)
variable factor of production (2)
inputs that can be changed in the short run
changes if the level of output changes
fixed factor of production
input that can’t be changed in the short-run
stays the same, regardless of how much output is produced
margarita product
change in total output associated with using one more unit of input/employee
negative marginal product
fixed capital and employees getting in each others way
specialization
marginal product increases when workers develop new skills
law of diminishing returns
successive increases in inputs eventually lead to less additional output
short run cost
variable cost + fixed cost
variable cost
associated with the fixed factors of production
fixed cost
associated with the fixed factors of production
average total cost
ATC = AVC (variable) + AFC (fixed)
total cost
ATC x Q
marginal cost
change in total cost / the change in quantity
total revenue
TR = P x Q sold
marginal revenue
change in total revenue associated with producing
= market price
economic profit
total revenue - total costs (explicit and implicit like opportunity cost)
zero or above is good
optimal quantity
MR = MC
profit (putting it all together)
Profit = (P-ATC) x Q
price elasticity of supply
how responsive producers/quantity supplied are to changes in the market price
price elasticity of supply: greater
the more inventory the firm has
the more easily the firm can hire workers
the longer the time horizon
shutdown (2)
decision to stop producing in the short run
occurs if the price falls below average variable cost
sunk costs
costs that once committed can never be recovered and should not affect current and future production decision
producer surplus + formula
difference between market price and marginal cost
base x height / 2
planning period
what is the optimal level of capital
economies of scale
ATC falls as quantity produce increases
constant returns to scale
ATC does not change as output increases
diseconomies of scale
ATC increases as output increases
long-run competitive equilibrium
firms enter and exit an industry
free entry or exit
no legal or technical barriers
as more firms enter the market…
new equilibrium and increases in market price
as firms exit the market…
new equilibrium and price will decrease
