the firm and it's customers Flashcards
demand curve d
The demand curve gives the quantity consumers will buy at each possible price
where is the feasible set in relation to the demand curve
to the left of the demand curve / under it
where is the profit maximising point in relation to the demand curve
the isoprofit line that is a tangent to the demand curve (isoprofit lines are L shaped but smooth curves)
what is the slope of the isoprofit curve
mrs - represents trade off willing to make between p and q
what is the slope of the demand curve
mrt - trade off that you are constrained to make (transform q into p)
economies of scale d
economies of scale occur when increasing output leads to lower long run average total costs
increasing returns d
when an increase in input results in a more than proportionate increase in output
decreasing returns d
when an increase in input leads to a less than proportionate increase in output
example of economies of scale
fixed costs (r&d fall as output increase),
purchasing (bulk buy),
financing (credit),
marginal cost equation
∆C/∆Q
what is the difference between the price and marginal cost called
profit margin
slope of isoprofit curve equation
- (P-MC)/Q,
- profit margin/quantity
how do you calculate mr
gain in revenue (21st car $6320, 6320)
loss of revenue ($80 on each of 20 cars, -1600)
marginal revenue=$4720,
or
q=20 p=6400 128000
q=21 p=6320 132720
mr=4720
what is the profit maximising output (think back to a level)
mr=mc
why is the profit maximising output mr=mc
profit = total revenue - total cost,
marginal profit = mr - mc
where is the producer and consumer surplus
consumer above and producer below
consumer surplus d
The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold
producer surplus d
The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold
where is the deadweight loss
triangle between where curves cross and the actual p and q and then draw down
deadweight loss d
loss of total surplus relative to a pareto efficient allocation
ped d
The percentage change in demand that would occur in response to a 1% increase in price
when elasticity is higher than 1 what is mr
mr>0
when elasticity is below 1 what is mr
mr<0
firm will always choose a point where the elasticity is _____ than one
greater,
because below 1, mr<0 so would be better to decrease the quantity to raise revenue and decrease costs
profit margin d
The difference between the price and the marginal cost
where is the pareto efficient outcome on the demand curve and marginal cost diagram
where the demand curve meets the marginal cost curve and neither the consumer nor producer surplus can be increased
the lower the elasticity of demand the ____ a firm will ____ price _____ the marginal cost to a achieve a high profit margin
more,
raise,
above
monopoly d
firm that is the single seller of a product without close substitutes
example of monopoly regulation
ibm
the lower the elasticity of demand, the _____ the profit margin and the deadweight loss
higher
cartel d
A group of firms that collude in order to increase their joint profits
competition policy d
Government policy and laws to limit monopoly power and prevent cartels
why is competition policy not always a good solution
domestic utilities such as water have high costs associated with providing the supply network
natural monopoly d
industry which requires substantial fixed costs such that LRATC curve is sufficiently downward sloping to make it impossible to sustain competition among firms in the market
what is an alternative to natural monopolies
public ownership
