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Econ > Unit Six > Flashcards

Unit Six Flashcards

1
Q

Characteristics of perfect competition

A

There are no barriers to entry
There are many firms
Products in a market are homogenous
Firms are price-takers: prices are determined by the buyers and sellers in the market

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2
Q

There are no barriers to entry

A

Barriers to entry are restrictions/requirements that keep firms from entering and exiting the market

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3
Q

There are many firms

A

The more firms, the more competition

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4
Q

Products in a market are homogenous

A

Identical/perfect substitutes

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5
Q

Firms are price-takers

A

Prices are determined by the buyers and sellers in the market
Supply and demand
EQ price is accepted by all firms

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6
Q

Perfectly competitive firm

A

One company that is a part of a market for a good

A perfectly competitive market is made up of more than a few perfectly competitive firms that produce the same good

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7
Q

The perfectly competitive firm’s supply curve

A

The lowest the firm is willing to supply goods is at the cost of producing the good
The marginal cost curve sets the firm’s willingness to supply or the absolute least the firm can charge for the next item produced

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8
Q

Market supply and demand graph

A

Supply and demand cross at equilibrium price and quantity

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9
Q

Firm supply and demand graph

A

MC is supply, down then curves up

Equilibrium price is demand, perfectly elastic, same as MR

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10
Q

Perfectly competitive firm’s demand curve

A

The perfectly competitive firm’s demand curve derives from the equilibrium price in the market
It is perfectly elastic because the firm sells all goods at that one price
The firm has no power to change its price
The revenue from each good sold is equal to the market price

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11
Q

Marginal revenue

A

The change in total revenue from selling another unit

MR = change in TR / change in output

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12
Q

MR. DARP

A

AR = TR/Q = Price
If there is only one possible price then AR must equal MR
AR = average revenue
MR = marginal revenue
P = price = demand = average revenue = marginal revenue

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13
Q

Profit

A

Total revenue - total cost

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14
Q

Average profit

A

Price - average total cost

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15
Q

Marginal profit (profit at each level of output)

A

MR - MC

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16
Q

Average profit

A

Profit / Q

17
Q

Average profit

A

(Total revenue - total cost) / Q

18
Q

Profit maximization rule

A

Profit is maximized where MR = MC
If MR > MC then you should produce more
If MC > MR then you should produce less

19
Q

Average total cost (ATC)

A

Shows the average cost of producing one unit at a particular level of output
Profit can be determined by comparing ATC to price at a particular level of output

20
Q

PC firms in the short run

A

PC firms can make profits or losses in the short run

21
Q

Drawing profit and loss: quantity line test

A

Locate q firm in producing at
Draw vertical line up to p. Draw horizontal line to y axis
Draw vertical line up to ATC. Draw horizontal line to y axis
Shade box
Area of box = Q x (P - ATC)

22
Q

Market power

A

The ability to influence the price of a product

PC firms don’t have because they’re price takers, due to significant number of firms in the market

23
Q

PC firms in the long run

A

If P > ATC, firms enter, shifts supply right
If P < ATC, firms exit, shift supply to left
Firms can’t enter/exit in the short run due to the presence of fixed costs

24
Q

Profits

A

There are no economic profits or losses in PC firms in the long run due to a lack of barriers to entry
Firms are said to be earning a normal profit or a profit that just covers their implicit costs

25
Q

PC firms in the short run

A

PC firms can’t enter/exit in the short run due to fixed costs
If they are losing money they can either shut down or stay open
If P > AVC stay open
If P < AVC shut down

26
Q

Sunk cost

A

A cost that has already been committed and can not be recovered
Fixed costs are sunk in the short run

27
Q

The short run market supply curve

A

Derives from the portion of the MC curve that is greater than AVC
The market is unwilling to supply below AVC
The long run PC market supply curve derives from the portion of MC that is above ATC

28
Q

How do taxes and subsidies affect supply and demand

A

Taxes lower them, subsidies raise them

29
Q

Per unit vs lump sum taxes

A

Per unit affects marginal cost, lump sum affects ATC

30
Q

Lump sum subsidy

A

ATC decreases, MC no change, output no change

31
Q

Lump sum tax

A

ATC increase, MC no change, output no change

32
Q

Per unit subsidy

A

ATC decrease, MC decrease, output increase

33
Q

Per unit tax

A

ATC increase, MC increase, output decrease

34
Q

Industry

A

Another word for market

35
Q

Allocative efficiency

A

Marginal cost = price

36
Q

Productive efficiency

A

Lowest ATC

37
Q

Break even price

A

Minimum average total cost

38
Q

Shut down price

A

Minimum average variable cost

Econ (14 decks)

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