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Implicit
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Opportunity cost of resources used
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Explicit
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Out of pocket cost
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Accounting Profit
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Refers to the difference between total revenue and total explicit cost
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Economic profit
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Implicit costs (generally higher than accounting profit)
Provides justification for decision to start a new business.
Provides justification for decision to start a new business.
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Long run
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The time when all inputs and costs are variable
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Short term
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The time period when at least one input is fixed
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Fixed Cost
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The explicit and implicit costs of fixed inputs. DO NOT vary with the output (fixed)
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Sunk Cost
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The costs a firm can NOT recover at all
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Variable costs
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Explicit and implicit costs of variable inputs the vary with the amount of output produced.
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Law of Diminishing marginal returns
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As one variable input increases, keeping other inputs constant, the additional output will decrease at some point
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Marginal Cost
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Ratio of change in total costs due to change in output
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Average cost
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Ratio of goal cost to total output
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Marginal-Average Rules
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Marginal cost equals average cost at its minimum.
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Marginal Cost Curve is above Average Cost curve, then...
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Average Cost is increasing
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Marginal cost curve is below Average Cost Curve, then...
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Average Cost is decreasing
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Economies of Scale
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Long run average cost decreases as output increases
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Diseconomies of scale
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Long run Average cost increases as output increases
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Minimum efficient scale
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Output level at which economies of scale stop
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Key features of a competitive market
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-Large number of firms ( price take firms)
-Homogenous product
-Free entry and Exit (no sunk cost)
-Homogenous product
-Free entry and Exit (no sunk cost)
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Perfect competition and supply in the short run
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-Demand Curve as a horizontal line for a single firm
-Average Revenue(TR/Q)=Marginal revenue(Change in revenue/change in quantity)
-Average Revenue(TR/Q)=Marginal revenue(Change in revenue/change in quantity)
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Profit Maximizing conditions
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AR=MR=MC
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Profit is positive as long as...
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Price> Average Total Cost
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Shut Down Conditions
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-Firm will operate in the short run as long as it is able to recover its variable cost.
-If price drops below average variable cost(AVC), the loss by operating exceeds the loss by shutting down. (Irrelevance of Sunk Cost).
-Firm shuts down (not leaving market) if Price<AVC.
-If price drops below average variable cost(AVC), the loss by operating exceeds the loss by shutting down. (Irrelevance of Sunk Cost).
-Firm shuts down (not leaving market) if Price<AVC.
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Long Run Equilibrium Conditions
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AR=MR=MC=LRATC (Zero economic profit)
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Monopoly
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Market structure with no close substitutes
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Monopolist Dilemma
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-How much price to set?
-Only way to sell more is to lower price.
-Downward sloping demand curve (AR).
-Downward sloping marginal revenue (MR).
-MR decreases faster than AR.
-As price (AR) is lowered, it reduces additional revenue from all goods sold before.
-Only way to sell more is to lower price.
-Downward sloping demand curve (AR).
-Downward sloping marginal revenue (MR).
-MR decreases faster than AR.
-As price (AR) is lowered, it reduces additional revenue from all goods sold before.
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Profit Maximization Rule
answer
-MR=MC.
-AR=Price >MC
-AC>AR= loss in the short run for monopolist
-AR=Price >MC
-AC>AR= loss in the short run for monopolist
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Criticism of Monopoly
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-The output lost due to prices above marginal cost.
-Deadweight loss due to monopoly(loss in consumer and producer surplus not accruing to anybody).
-Deadweight loss due to monopoly(loss in consumer and producer surplus not accruing to anybody).
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