Unit 7 - The Firm and its Customers Flashcards
Profit - formulas
Profit = total revenue - total costs
Profit = (price-cost) x quantity
Profit = Q(P-AC)
Isoprofit curve definition
Joins the points that give the same level of total profit
Profit maximizing using isoprofit curves
- The demand curve determines what is feasible
- Profit max - where demand curve is tangent to isoprofit curve - where the slope of the D curve = slope of the isoprofit curve => MRT = MRS
Economies of scale
- the technological advantages of large-scale production
- Cost per unit falls when the firm grows beyond a certain size
- increasing returns - if inputs are increased by a given proportion, output increases more than proportionally
Diseconomies of scale
- Diseconomies of scale - limits to growth
- Decreasing returns - if if inputs are increased by a given proportion, output increases less than proportionally
Opportunity cost of capital
- the return on investment received if the money would have been invested in something else
Marginal Cost
- the additional cost of producing one more unit of output
- it’s the slope of the cost function
- MC = change in cost/change in quantity
Economic profit
= the additional profit above the minimum return required by shareholders (normal profit - opportunity cost of capital)
Zero-economic profit curve
P=AC at all points on the curve
Profit margin
Profit margin = Price - Average Cost
Isoprofit curve - the slope
Slope of isoprofit = -profit margin/quantity
- the trade-off the firm is willing to make between P and Q
- the slope of the isoprofit curve will depend on the AC curve (because profit per unit is P-AC)
Marginal Revenue
MR = change in revenue/change in quantity
Marginal Profit
Marginal Profit = MR - MC
Point of Profit Max
MC = MR
Consumer Surplus
= the difference between what consumers are willing and able to pay and what they actually pay
- it is a measure of the benefits of participation in the market for consumers
Producer Surplus
- Producer Surplus = Revenue - MC
- doesn’t account for fixed costs
Profit = producer surplus - fixed costs
Price Elasticity of Demand
- measure of the responsiveness of consumers to a price change
- PED = %change in q demanded/ % change in price
When demand is elastic, the profit margin is …
Profit margin is small + the deadweight loss is small
Deadweight loss
- the loss of potential surplus (producer/consumer)
- the existence of deadweight loss means that the allocation is not Pareto efficient
- it’s a consequence of market failure - the unexploited gains from trade
Natural monopoly
- when a single firm can supply the whole market at lower AC than multiple firms
