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"invisible hand."
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Market forces coordinate production as if by an "invisible hand." ......businesses are motivated by the profit incentive....but market competition is good for the general welfare of a society
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Elasticity of demand
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Measures the percentage change in quantity demanded divided by percentage change in price
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Explicit cost
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An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, which are those where no actual payment is made. It is possible still to underestimate these costs, however: for example, pension contributions and other 'perks' must be taken into account when considering the cost of labour.
Explicit costs are taken into account along with implicit ones when considering economic profit.
Explicit costs are taken into account along with implicit ones when considering economic profit.
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Implicit cost
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In economics, an implicit cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting, selling, or lending it.
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Total revenue
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Total revenue is the total receipts of a firm from the sale of any given quantity of a product.
total revenue = price × quantity,
total revenue = price × quantity,
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Absolute advantage
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The ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
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Free entry
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Free entry is implied by the perfect competition condition that there is an unlimited number of buyers and sellers in a market. In comparison to perfect competition, however, free entry is a condition often more applicable to real world conditions.
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Marginal cost
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The change in total cost that arises when the quantity produced changes by one unit.
MC=𐤃TC/𐤃Q
MC=𐤃TC/𐤃Q
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Total cost
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In economics, and cost accounting, total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs.
The rate at which total cost changes as the amount produced changes is called marginal cost.
TC=TVC+TFC
The rate at which total cost changes as the amount produced changes is called marginal cost.
TC=TVC+TFC
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Average cost
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Is the total cost divided by the number of goods produced
TC/QTY
TC/QTY
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Competitive equilibrium
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Competitive equilibrium is an equilibrium condition where the interaction of profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices will give rise to an equilibrium price. At this equilibrium price, the quantity supplied is equal to the quantity demanded.
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Barriers to entry
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Obstacles that make it difficult to enter a given market.
Caused eg:
government regulation,
economies of scale,
education or licensing requirements.
Caused eg:
government regulation,
economies of scale,
education or licensing requirements.
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Economic rent
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The difference between the raw costs of everything needed to produce the goods or service and the price.
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Interest rate
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An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender
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Present value
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Is the value on a given date of a future payment
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Market Coordination
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The process in which individuals perform tasks, such as producing certain quantities of goods, based on changes in market forces, such as supply, demand and price.
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Managerial Cooordination
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The process on which managers direct employees to perform certain tasks
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Accounting Profit
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Equal to revenue minus explicit cost. Making decisions based on this can be misleading, it is often considerably larger than the economic profit because it includes only explicit costs and not implicit costs.
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Economic Profit
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Equal to revenue minus the opportunity cost of resources used. It is usually less than the accounting profit. Takes into account implicit costs such as the opportunity cost of time and the implicit cost of capital.
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Normal Profit (Zero Economic Profit)
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A normal profit is an economic condition that occurs when the difference between a firm's total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market
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Define short run
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a period when some wages and other prices are sticky and do not respond to changes in economic conditions
- may prevent an economy from operating at potential output
- may prevent an economy from operating at potential output
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Define long run
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a period where wages are prices are flexible
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What is a sticky price?
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a price that is slow to adjust to equilibrium level, creating periods of a shortage or surplus
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A change in the aggregate quantity of goods and services supplied is characterized by what?
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a movement along the short-run supply curve
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What is the long- run aggregate supply curve?
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Relates the level of output produced by firms to the price level in the long run
- vertical line
- vertical line
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Marginal physical product (MPP)
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Marginal physical product is the extra output generated by an extra input. Eg. the change in total physical product resulting from a change in the number of workers.
MPP = 𐤃Total Physical product/ 𐤃 variable input
MPP = 𐤃Total Physical product/ 𐤃 variable input
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Total Physical Product (TPP)
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Total physical product is the total production of output by a firm based on the quantity of inputs used.
like Total Product, but measured in qty units rather than monetary units.
like Total Product, but measured in qty units rather than monetary units.
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Law of Diminishing Marginal Returns
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The law of diminishing marginal returns means that the productivity of a variable input declines as more is used in short-run production, holding one or more inputs fixed.
This law has a direct bearing on market supply, the supply price, and the law of supply. If the productivity of a variable input declines, then more is needed to produce a given quantity of output, which means the cost of production increases, and a higher supply price is needed. The direct relation between price and quantity produced is the essence of the law of supply.
This law has a direct bearing on market supply, the supply price, and the law of supply. If the productivity of a variable input declines, then more is needed to produce a given quantity of output, which means the cost of production increases, and a higher supply price is needed. The direct relation between price and quantity produced is the essence of the law of supply.
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when does Diminishing Marginal Returns set in
answer
the difference between the 1st worker and 2nd worker is 10, the difference between 2nd worker and 3rd worker is 8. It is Diminishing Marginal Returns when we go from 1 worker to 2. if this number was increasing then its Increasing Marginal Returns at a certain point
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Average Total Cost (ATC)
answer
AC = TC/Qty
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Marginal Costs (MC)
answer
𐤃TC/𐤃Qty
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Profit
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TR - TC
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Total Revenue (TR)
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P(Qty)
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Maximized Profit
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MR=MC or MR > MC
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marginal Revenue (MR)
answer
𐤃/TR/𐤃Qty
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Marginal Average Rule
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The marginal cost curve intersects the minimum points of the average total costs (ATC) and Average variable cost (AVC) curves
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Marginal Physical Product vs. Marginal Cost
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In economics, marginal cost represents the total cost to produce one additional unit of product or output. Marginal product is the extra output generated by one additional unit of input, such as an additional worker.
They are inversely related to one another: as one increases, the other will automatically decrease proportionally and vice versa.
Attributed to the law of diminishing returns
This law states that, as one continues to add resources or inputs to production, the cost per unit will first decline, then bottom out, and finally start to rise again.
They are inversely related to one another: as one increases, the other will automatically decrease proportionally and vice versa.
Attributed to the law of diminishing returns
This law states that, as one continues to add resources or inputs to production, the cost per unit will first decline, then bottom out, and finally start to rise again.
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Sunk Costs
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A sunk cost is a cost that has already been incurred and cannot be recovered.
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Ignore Sunk Costs
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Since decision-making only affects the future course of business, sunk costs should be irrelevant in the decision-making process.
as a result, it is best to ignore them as they will have no affect on the future decisions
as a result, it is best to ignore them as they will have no affect on the future decisions
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economies of scale
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(increasing returns to scale) An increase in a firm's scale of production leads to lower costs per unit produced.
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constant returns to scale
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An increase in a firm's scale of production has no effect on costs per unit produced.
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dis-economies of scale
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(decreasing returns to scale) An increase in a firm's scale of production leads to higher costs per unit produced.
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minimum efficient scale
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The smallest size at which the long-run average cost curve is at its minimum.
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long-run average cost curve
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The "envelope" of a series of short-run cost curves.
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constant returns
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Constant returns to scale mean that the firm's long-run average cost curve remains flat.
Changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).
Changes in output resulting from a proportional change in all inputs (where all inputs increase by a constant factor).
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long-run competitive equilibrium
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P = SRMC + SRAC = LRAC
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long-run supply curves
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is the sum of a series of that market's short-run supply curves.
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Shifts in the Cost Curves
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1. Technology.
A technological change that increases productivity shifts the product curves upward and the cost curves downward. If a technological change results in the firm using more capital, the average fixed cost curve shifts upward and at low levels of output, the average total cost curve may shift upward.
2. Prices of factors of production.
An increase in the price of a factor of production increases costs and shifts the cost curves upward. An increase in fixed cost does not affect the variable cost or marginal cost curves (TVC, AVC, and MC curves). An increase in variable cost does not affect the fixed cost curves (TFC and AFC). The total cost curves (TC and ATC curves) are affected by a price change for any factor of production.
A technological change that increases productivity shifts the product curves upward and the cost curves downward. If a technological change results in the firm using more capital, the average fixed cost curve shifts upward and at low levels of output, the average total cost curve may shift upward.
2. Prices of factors of production.
An increase in the price of a factor of production increases costs and shifts the cost curves upward. An increase in fixed cost does not affect the variable cost or marginal cost curves (TVC, AVC, and MC curves). An increase in variable cost does not affect the fixed cost curves (TFC and AFC). The total cost curves (TC and ATC curves) are affected by a price change for any factor of production.
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price takers
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take same price as other markets.
perfectly competitive- many firms/ identical products.
perfectly competitive- many firms/ identical products.
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price searchers
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firms that face a downward sloping demand curve for their product. (price makers)
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Demand in a Perfectly Competitive Market
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The market, which includes all firms (industry), is downward sloping, while the demand curve for the individual firm is flat or perfectly elastic.
The difference in the slopes of the market demand curve and the individual firm's demand curve is due to the assumption that each firm is small in size. No matter how much output an individual firm provides, it will be unable to affect the market price. Note that the individual firm's equilibrium quantity of output will be completely determined by the amount of output the individual firm chooses to supply.
The difference in the slopes of the market demand curve and the individual firm's demand curve is due to the assumption that each firm is small in size. No matter how much output an individual firm provides, it will be unable to affect the market price. Note that the individual firm's equilibrium quantity of output will be completely determined by the amount of output the individual firm chooses to supply.
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Allocative efficiency
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Optimal levels of all goods are produced and sold to consumers who value them most
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Productive efficiency
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Industry output is produced at lowest possible total cost to society
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Identify Profit
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price > ATC
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Identify Loss
answer
Price < ATC
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When Price < ATC should it shut down?
answer
if MR=MC as long as the firm TR > VC it should continue to produce. it will reduce its loss below the TFC
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Short‐run supply curve
answer
The firm's short‐run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve. As the market price rises, the firm will supply more of its product, in accordance with the law of supply. If, however, the market price, which is the firm's marginal revenue curve, falls below the firm's average variable cost, the firm will shut down and supply zero output.
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Difference between Short Run & Long Run Equilibrium
answer
The main difference between long run and short run costs is that there are no fixed factors in the long run; there are both fixed and variable factors in the short run . In the long run the general price level, contractual wages, and expectations adjust fully to the state of the economy.
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Long run competitive equilibrium
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In the long run firms can enter and exit the industry.
results in zero economic profits.
The existence of economic profits attracts entry, economic losses lead to exit, and in long-run equilibrium, firms in a perfectly competitive industry will earn zero economic profit. The long-run supply curve in an industry in which expansion does not change input prices (a constant-cost industry) is a horizontal line.
results in zero economic profits.
The existence of economic profits attracts entry, economic losses lead to exit, and in long-run equilibrium, firms in a perfectly competitive industry will earn zero economic profit. The long-run supply curve in an industry in which expansion does not change input prices (a constant-cost industry) is a horizontal line.
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a constant-cost industry
answer
an industry in which expansion of output does not bid up input prices, the long-run average production cost per unit remains unchanged, and the long-run industry supply curve is horizontal
question
To derive the long-run supply curve for a constant-cost industry,
answer
we start from a position of equilibrium and trace the effects of a demand change until the industry one again returns to a long-run equilibrium.
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Increasing-Cost Industry
answer
an industry in which expansion of output leads to higher long-run average production costs and the long-run supply curves slopes upward.
question
derive the long-run supply curve for an increasing-cost industry
answer
Assume an initial long-run equilibrium; then the demand curve shifts, and we follow the adjustment process through to its conclusion.
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Decreasing-Cost industry
answer
a highly unusual situation in which the long-run supply curve is downward sloping. through the expansion of output by the industry in some way lowers the cost curves of the individual schools, leading to a new long-run equilibrium with a higher output but a lower price.
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Monoploy
answer
1 firm
Ultimate Market Power, a barrier to other entering market firms, no Supply Curve, "Price-Maker"
1) Single Firm owns key resource
2) Granted permission by gov't to produce good
3) Natural Monopoly - Absolute Advantage (Q) to produce at a lower cost
Ultimate Market Power, a barrier to other entering market firms, no Supply Curve, "Price-Maker"
1) Single Firm owns key resource
2) Granted permission by gov't to produce good
3) Natural Monopoly - Absolute Advantage (Q) to produce at a lower cost
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Profit Maximization - Monopoly:
answer
Maximizes Q at MR = MC
Sets Highest P where Consumers are WTP (Willing to pay)
Finds P on D Curve
Sets Highest P where Consumers are WTP (Willing to pay)
Finds P on D Curve
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Why the demand curve is downward - Monopoly
answer
A monopolist is price maker with constraint. The constraint is public demand. He can either fix prices or output but not both.
The reason is simply this, if he charges too high, people will walk away, ie completely do away with that commodity
The reason is simply this, if he charges too high, people will walk away, ie completely do away with that commodity
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Monopoly
answer
The monopolist faces the downward‐sloping market demand curve, so the price that the monopolist can get for each additional unit of output must fall as the monopolist increases its output. Consequently, the monopolist's marginal revenue will also be falling as the monopolist increases its output.
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Natural monopolies
answer
A natural monopoly is a monopoly that exists because the cost of producing the product (i.e., a good or a service) is lower due to economies of scale if there is just a single producer than if there are several competing producers.
A monopoly is a situation in which there is a single producer or seller of a product for which there are no close substitutes. Economies of scale is the situation in which the cost to a company of producing or supplying each additional unit of a product (referred to by economists as marginal cost) decreases as the volume of output increases.
Economies of scale is just one reason for the existence of monopolies. Monopolies also exist because of sole access to some resource or technology and because of the use of non-market means to eliminate competition, including buying up competitors, colluding with suppliers or customers to discriminate against competitors, enacting legislation to restrict competition, threatening costly lawsuits or even engaging in physical violence.
A monopoly is a situation in which there is a single producer or seller of a product for which there are no close substitutes. Economies of scale is the situation in which the cost to a company of producing or supplying each additional unit of a product (referred to by economists as marginal cost) decreases as the volume of output increases.
Economies of scale is just one reason for the existence of monopolies. Monopolies also exist because of sole access to some resource or technology and because of the use of non-market means to eliminate competition, including buying up competitors, colluding with suppliers or customers to discriminate against competitors, enacting legislation to restrict competition, threatening costly lawsuits or even engaging in physical violence.
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When firms experience economies of scale?
answer
If long-run average cost declines as the level of production increases, a firm is said to experience economies of scale.
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Network Externalities
answer
Network externalities (also called network effects) occur when the value of a good or service increases as a result of many people using it. Because of network effects, certain goods or services that are adopted widely will appear to be much more attractive to new customers than competing goods or services. This is evident in online social networks. Social networks with the largest memberships are more attractive to new users, because new users know that their friends or colleagues are more likely to be on these networks
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Short-Run Profit Or Loss - Monopoly
answer
Monopolists will experience short‐run losses whenever average total costs exceed the price that the monopolist can charge at the profit maximizing level of output.
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Long-Run Profit Or Loss - Monopoly
answer
The existence of high barriers to entry prevents firms from entering the market even in the long‐run. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long‐run.
question
3 conditions of price discrimination
answer
Differences in price elasticity of demand: There must be a different price elasticity of demand for each group of consumers. The firm is then able to charge a higher price to the group with a more price inelastic demand and a lower price to the group with a more elastic demand.
Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent "consumer switching" - i.e. consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price.
must have price setting ability to do the above
Barriers to prevent consumers switching from one supplier to another: The firm must be able to prevent "consumer switching" - i.e. consumers who have purchased a product at a lower price are able to re-sell it to those consumers who would have otherwise paid the expensive price.
must have price setting ability to do the above
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price discrimination
answer
- Business practice
- Procedures sell the exact same product to different consumers at different prices.
- Increase profit
- Procedures sell the exact same product to different consumers at different prices.
- Increase profit
question
Compare and contrast between perfect competition and monopoly
answer
In the discussion of a perfectly competitive market structure, a distinction was made between short‐run and long‐run market behavior. In the long‐run, all input factors are assumed to be variable, making it possible for firms to enter and exit the market. The consequence of this entry and exit of firms was that each firm's economic profits were reduced to zero in the long‐run.
The distinction between the short‐run and the long‐run is not as important in the case of a monopolistic market structure. The existence of high barriers to entry prevents firms from entering the market even in the long‐run. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long‐run.
The distinction between the short‐run and the long‐run is not as important in the case of a monopolistic market structure. The existence of high barriers to entry prevents firms from entering the market even in the long‐run. Therefore, it is possible for the monopolist to avoid competition and continue making positive economic profits in the long‐run.
question
Excess capacity
answer
when a firm produces less than efficient scale
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