question
What are the characteristics of a perfectly competitive market?
answer
1) There are a large number of sellers (each seller is small comparative to the whole. No seller could satisfy the demand of the entire market.)
2) There are a large number of buyers (not possible for any one buyer to influence the market price)
3) Each seller must provide a similar product. (In an apple market, all sellers must produce apples)
4) It is EASY to enter in to the market. (If you want to start your own business...there are no significant barriers to entry). You don't need a license, etc.
2) There are a large number of buyers (not possible for any one buyer to influence the market price)
3) Each seller must provide a similar product. (In an apple market, all sellers must produce apples)
4) It is EASY to enter in to the market. (If you want to start your own business...there are no significant barriers to entry). You don't need a license, etc.
question
What are barriers to entry?
answer
1) No government action preventing more firms from entering into the industry.
EXAMPLE: If facility wants to sell alcohol there are normally limits to how many licenses the state will distribute, making it hard.
EXAMPLE: If facility wants to sell alcohol there are normally limits to how many licenses the state will distribute, making it hard.
question
In a perfectly competitive market, who makes the decision on how much to produce and what price to sell?
answer
It is based on the characteristics of the market in which the seller/buyer is operating.
question
The objective is to maximize profit for these firms. How?
answer
Use PI sign to represent profit. When you maximize profit, you are looking at the difference between Total revenue and Total Cost. PI=TR-TC
question
What is a price taker?
answer
Nobody has influence over the price. It is determined in the market. Individual firm price takers will see a PERFECTLY ELASTIC demand curve that is equal to the market price.
question
BIQ Q and little q
answer
BIG Q represent the quantity of the market, while little q represent the quantity of one firm.
question
Marginal Revenue
answer
Change in TR/Change in output
Output Price TR (PxQ) MR
_____ _____ ______ ____
0 $3 0
1 $3 3 $3
2 $3 6 $3
3 $3 9 $3
4 $3 12 $3
*In a perfectly competitive firm, Marginal Revenue curve would lie on top of perfectly elastic demand curve. Also unique that MR=Market price.
Output Price TR (PxQ) MR
_____ _____ ______ ____
0 $3 0
1 $3 3 $3
2 $3 6 $3
3 $3 9 $3
4 $3 12 $3
*In a perfectly competitive firm, Marginal Revenue curve would lie on top of perfectly elastic demand curve. Also unique that MR=Market price.
question
Total Revenue
answer
Price x Quantity
question
Accounting Costs=Explicit Costs
answer
"The obvious costs," or the ones that require a MONETARY payment.
Ex: Equipment, rent, car payment.
Ex: Equipment, rent, car payment.
question
Economic Costs=Explicit + Implicit
answer
Less obvious costs.
Ex: Implicit Costs=Lost interest that you could have earned if you didn't take money out of bank, or money you could have earned had you not quit your job + Explicit costs (above)
Ex: Implicit Costs=Lost interest that you could have earned if you didn't take money out of bank, or money you could have earned had you not quit your job + Explicit costs (above)
question
How do you find Accounting Profit?
answer
ACCT Profit= Revenue-accounting costs
Ex: if revenue is $51,000 and acct costs are $50,000, accounting profit will equal $1,000.
Ex: if revenue is $51,000 and acct costs are $50,000, accounting profit will equal $1,000.
question
How do you find Economic Profit?
answer
ECON Proft=Revenue-economic costs
Ex: revenue is still $51,000, but economist would say true cost=(50,000 explicit + 3,500 implicit)...therefore $51,000-$3,500=$-2,500. So an ECONOMIST would say you have a loss. So notice your Economic Profit will always be lower than Accounting Profit.
When talking about Costs and Profits, we are ALWAYS talking about economic costs and profit.
Ex: revenue is still $51,000, but economist would say true cost=(50,000 explicit + 3,500 implicit)...therefore $51,000-$3,500=$-2,500. So an ECONOMIST would say you have a loss. So notice your Economic Profit will always be lower than Accounting Profit.
When talking about Costs and Profits, we are ALWAYS talking about economic costs and profit.
question
Characteristics of the Short Run (2)
answer
1) The firm has at least one fixed input that doesn't change
Example: You run a coffee shop and you only have four coffee makers...that isn't going to change.
2) No entry or exit of firms. There can be entry or exit in the LONG run, but not short run.
Example: You run a coffee shop and you only have four coffee makers...that isn't going to change.
2) No entry or exit of firms. There can be entry or exit in the LONG run, but not short run.
question
Fixed Cost (FC)
answer
Costs do not vary with the amount of output produced
In a table, if you see that the output is zero, but there is a dollar amount in the TC section, that is the fixed cost.
In a table, if you see that the output is zero, but there is a dollar amount in the TC section, that is the fixed cost.
question
Variable Cost (VC)
answer
Will vary as more output is produced...costs of water.
Do increase as output increases
Do increase as output increases
question
Total Cost
answer
Summation of Fixed and Variable costs
question
Average Fixed Cost
answer
AFC=Total fixed cost/Quantity of output
AFC will fall as Quantity rises because the firm is spreading its fixed costs over a larger number of units.
"spreading out our overhead"
AFC will fall as Quantity rises because the firm is spreading its fixed costs over a larger number of units.
"spreading out our overhead"
question
Average Variable Cost
answer
AVC=Total variable cost/Quantity of output
AVC will fall as Quantity rises...eventually though, average variable cost will begin to rise.
AVC will fall as Quantity rises...eventually though, average variable cost will begin to rise.
question
Average Total Cost
answer
ATC=Total cost/Quantity of output
The ATC curve is U-shaped--as quantity rises,
The ATC curve is U-shaped--as quantity rises,
question
Marginal Cost
answer
Change in total cost after producing an additional unit of output.
MC=TC/Q
Whenever MC is less than average total cost, then average cost is going to fall.
Whenever MC is greater than average total cost, then average total cost is going to go up
(If you're average in ECON is a 50 and you make a 100 on a test, your total average will increase)
Marginal cost curve comes up through the minimum of
1-variable cost curve and 2-average total cost curve
MC=TC/Q
Whenever MC is less than average total cost, then average cost is going to fall.
Whenever MC is greater than average total cost, then average total cost is going to go up
(If you're average in ECON is a 50 and you make a 100 on a test, your total average will increase)
Marginal cost curve comes up through the minimum of
1-variable cost curve and 2-average total cost curve
question
Production decision for a firm
answer
The firms MR will be = to the market price.
The firms objective is to maximize profit, and to do that, the firm will produce at the point where
marginal revenue = marginal cost. It is also true that at the at the optimal quantity, price is also equal to marginal cost.
To see if the firm is making profit or loss, at the optimal quantity, we compare the market price that the firm sees to the firms average cost of production at q. If the price is greater than the average cost at q, then making a PROFIT. If the price is less than average cost at q*, then the firm is losing money.
The firms objective is to maximize profit, and to do that, the firm will produce at the point where
marginal revenue = marginal cost. It is also true that at the at the optimal quantity, price is also equal to marginal cost.
To see if the firm is making profit or loss, at the optimal quantity, we compare the market price that the firm sees to the firms average cost of production at q. If the price is greater than the average cost at q, then making a PROFIT. If the price is less than average cost at q*, then the firm is losing money.
question
What does it mean to Shut Down?
answer
A firm chooses to produce a quantity equal to zero and it will incur an economic loss by paying its fixed cost. May be better to shut down than to lose money by producing.
question
When should a firm shut down?
answer
If it cannot cover it's variable costs! A firm will choose to operate if its TR is enough to cover its variable costs.
Use p>or equal to AVC
Even if your fixed cost is $100, if your AVC is $50 and you are making $55 then you should NOT shut down. Basically ignore your fixed costs.
Use p>or equal to AVC
Even if your fixed cost is $100, if your AVC is $50 and you are making $55 then you should NOT shut down. Basically ignore your fixed costs.
question
Characteristics of the Long Run (2)
answer
1) all inputs are variable
2) firms can enter and exit the market
2) firms can enter and exit the market
question
When does a firm exit in the long run?
answer
When they are incurring economic losses.
--If average cost is higher than marginal cost.
--If average cost is higher than marginal cost.
question
Supply curve will
answer
Shift to the right as more firms enter the market
Shift to the left as firms leave the market
Shift to the left as firms leave the market
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