Week 3 Flashcards
There are three principal questions that arise when it comes to maximizing a company’s profits, name them:
- What price should be set?
- What quantities should be produced?
- When should the industry be entered and when should it be left?
An industry is competitive when companies have little influence on the price of their product, while satisfying at least the following conditions:
- The product to be sold is almost identical among different sellers
- There are many sellers and many buyers, all relatively small compared to the total market
- There are many potential sellers
Define the ‘long run’
We define the long run as the time after an entry or exit has taken place
Define the ‘short run’
We define the short run as the period before an entry or exit.
Profit formula;
Profit = Total revenue - total cost
How must the difference between total revenue and total cost be to maximize profit?
The difference must be as large as possible
Define explicit costs
Literal money expenditure
Define implicit costs
Costs which do not require any monetary expenditure (opportunity costs)
What are opportunity costs
Opportunity costs refer to the possibility that you could have made more profit from another project.
Define Economic profit
Economic profit is total revenue minus total costs including implicit costs
Define Accounting profit
Accounting profit is total revenue minus explicit costs
Why is calculating economic profit important for entrepreneurs?
Calculating economic profit is important for entrepreneurs, who have to think about the future of the company.
Define Fixed costs
Fixed costs are those costs that do not change when output changes
Defnine variable costs
Variable costs are costs that do change when output changes.
Define total costs
Total of fixed and variable costs.
Formula average cost
Total cost / quantity
Profit formula including average costs
Profit = (P-AC) x Q”
The lowest price a company can offer without incurring losses is the minimum point of the…
… average cost curve
What does AVC stand for?
Average variable cost
Average variable cost Formula
(VC/Q)
What happens in an increasing-cost industry?
Costs are rising at higher output levels which leads to an upward-rising supply curve.
What happens in a constat cost industry?
Costs remain the same when changes in industrial output occur and this ensures a flat supply curve.
What happens in a decreasing-cost industry
Costs decrease with higher output, which is very rare.
This results in a downward slope curve
Name the first principal of price discrimination:
If demand curves differ, it is more profitable to apply different prices in different markets than a single price covering all markets.
In order to maximize profits, the monopolist must set a higher price on markets with more inelastic demand.
Define arbitrage
The difference in prices on markets can cause trade between markets outside the company.
Name the second principle of price discrimination
Arbitrage makes it difficult for a company to set different prices in different markets, thereby reducing the benefits of price discrimination.
Is price discrimination common?
Yes
Describe perfect price discrimination (PPD)
In perfect price discrimination, consumers pay exactly what they are willing to pay, and consumers have no consumer surplus.
Is price discrimination always bad?
Not always, a PPD monopolist produces more output than a single price monopolist, which is good.
When is price discrimination bad?
Price discrimination is bad when overall output falls or remains the same, but if output increases under price discrimination, the overall surplus will usually increase
Whats the advantage of price discrimination in industries with high fixed costs?
Profit increases when the market is larger.
Why are printers relatively cheap and cartridges so expensive?
HP sells printers below cost price, and cartridges above cost price.
Define the concept of tying in a business
To use one good, consumers must use a second good which is only sold by the same firm these companies sell the product as a package.
Describe the concept of bundling
Goods are bundled if they have to be purchased in a package.
What is a firm?
- Many different things to many different people
- Many different sources of inspiration to many different scholars
- The sole property of its owners
- The collaborative property of its stakeholders
