Topic 7 Flashcards
explain the slope of the MC curve
initially downward sloping due to increasing returns to variable labour but upward slope means diminishing returns to variable labour
what is the shape of the ATC and AVC curve and where do they cut MC
ATC: U shaped and cuts through MC at minimum point
AVC: U shaped and is below ATC (vertical distance represents fixed costs, cuts through MC at minimum
what does a more competitive market mean
lower equilibrium price, greater quantity and more efficient resource allocation
define a perfect market and briefly state it’s characteristics
idealised market structure which is hard to be observed in reality (ag product, retail petrol market)
- many firms/ consumers (price takers)
- homogenous/undifferentiable goods
- free entry and exit ( no barriers)
what is marginal revenue w/ formula and what is it’s relationship with MC
the extra revenue received from selling one more unit of output (MR = P).
Firms will increase output as long as each extra unit sold adds more to TR than TC (MR >MC)
profit maximisation occurs when MR = MC (no incentive to move)
what is marginal revenue w/ formula and what is it’s relationship with MC
the extra revenue received from selling one more unit of output (MR = P).
Firms will increase output as long as each extra unit sold adds more to TR than TC (MR >MC)
profit maximisation occurs when MR = MC (no incentive to move)
what are the 4 short run profit positions firms can be in (Drawing their example graphs)
- pue economic profit (P > ATC)
- Zero/Normal Econ Profit (P=ATC)
- Quasi Loss (ATC> P>AVC)
- Shutdown (P< AVC)
explain quasi loss
the firms will make a smaller loss by continuing operating than if they shut down because shutdown means no costs so loss = total fixed costs. In quasi, price is still above AVC so revenue will cover the variable costs and make some contribution to covering ATC
what happens when firms are marking pos economic profit
new firms are attracted mean market supply shift right, price falls so profit nargin falls, decreasing incetive to join. Firms only cease to enter when normal economic profits are made
what happens when firms are making short run loss
firms will exit the industry, mkt supply falls and shifts left. price increases so profit loss margin decreases until no mroe loss being made
define productive efficiency and what is it’s formula
when output is produced with the least-cost combination of resources. In the long run it is achieved where LAC is minimum. In perf comp: firms always operated at minimum ATC in LR.
Price = MC = LACmin
define allocative efficiency w/ formula
when firms produce output that is most highly valued by consumers (to the value society holds). Price represented MB consumers receive from last unit. Firms produce until price = MC of last unit.
Price = MC =MC
define dynamic efficiency
ability to continually grow what is possible and improve amount of benefit/reduce cost (tech and innovation). Tech improvements help firms to achieve productive + allocative efficiency
