Unit 4 Flashcards
Why are monoplolies inifficient?
They produce at a quantity that is less than what society desires at a price that is
higher than what society desires.
They produce at a cost that is above their minimum average total cost (minimum
ATC).
what is the profit maximizing rule
The profit-maximizing rule in economics refers to the principle that a firm will maximize its profit when it produces at the quantity where marginal revenue (MR) equals marginal cost (MC). This is summarized as:
MR = MC
If MR > MC: Producing more units will increase profit because the revenue gained from selling additional units exceeds the cost of producing them.
If MR < MC: Producing fewer units will increase profit because the cost of producing additional units is greater than the revenue earned from selling them.
If MR = MC: The firm is producing at the profit-maximizing quantity. Any deviation from this level (producing more or less) would reduce profit.
Marginal Revenue (MR)
Marginal Revenue (MR): The additional revenue a firm earns from selling one more unit of output.
Marginal Cost (MC)
Marginal Cost (MC): The additional cost of producing one more unit of output.
short run supply curve
The short-run supply curve of a firm shows the relationship between the price of a good and the quantity the firm is willing to supply in the short run.
Shut-Down Point
The shut-down point is the level of output and price at which a firm is indifferent between continuing operations and shutting down in the short run. This occurs when:
Price = Minimum Average Variable Cost (AVC)
If Price < AVC: The firm shuts down because it cannot cover its variable costs, meaning it would lose less money by ceasing production.
If Price ≥ AVC: The firm continues to produce because it can cover variable costs and possibly contribute to fixed costs.
Visual Relationship
MC Curve Above AVC: Represents the firm’s willingness to produce at a profit or reduced loss.
MC Curve Below AVC: Represents the point where the firm will shut down operations because continuing production leads to greater losses than shutting down.
In summary:
Supply curve: MC curve above AVC.
Shut-down point: The price where MC intersects the minimum of the AVC curve.
What is productive efficiency
Productive efficiency occurs when a firm produces goods or services at the lowest possible cost. This means that resources are being used in the most efficient way to produce the maximum output at the minimum cost.
Minimum ATC
What is allocative efficiency
TotalRevenue(TR) formula
TotalRevenue(TR)=Price(P)×Quantity(Q)
marginal revenue formula
MR=ΔTR/ ΔQ
