question
What is Economic Profit?
answer
The difference between total revenue and total cost
question
What is Accounting Profit?
answer
The difference between total revenue and explicit cost incurred.
question
Economists assume that the goal of firms is to:
answer
maximize economic profit
question
What are the conditions for perfect competition?
answer
Firms sell a standardized product, firms are price takers, free entry and exit, firms and consumers have perfect information
question
What does it mean when firms sell a standardized product?
answer
It means that the product sold by one firm is assumed to be a perfect substitute for the product sold by any other firm.
question
What does it mean when firms are price takers?
answer
It means that the individual firm treats the market price of the product as given.
question
What does it mean when there is free entry and exit?
answer
It means there is perfectly mobile factors of production in the long run.
question
How does a firm maximize profit in the short run condition?
answer
The firm will choose the level of output where the difference between total revenue and total cost is largest.
question
What is marginal revenue?
answer
The change in total revenue when sales change by 1 unit.
question
In terms of marginal revenue, how does a firm maximize its profit in the short run condition?
answer
The firm should produce a level of output that sets marginal revenue equal to the marginal cost on the rising part of the MC curve.
question
Marginal cost will typically [blank] before it [blank].
answer
decrease, increases
question
On a graph, profit maximizing quantity occurs when:
answer
P=MR=MC
question
If price fails to cover AVC, the firm should do what?
answer
Shut down
question
What is the Shutdown condition?
answer
The firm should shut down in the short run if price falls below the minimum of average variable cost.
question
How do you get the short run competitive industry supply curve?
answer
Add up the output of each firm in an industry.
question
How do you get average total cost?
answer
Take the total cost and divide it by quantity.
question
Where is the Breakeven Point?
answer
The point where price is equal to the minimum of average total cost.
question
What does the Breakeven Point tell us?
answer
The lowest price at which the firm will not suffer negative profits in the short run.
question
What is allocative efficiency?
answer
a condition in which all possible gains from exchange are realized.
question
When is a competitive market efficient?
answer
When it maximizes the net benefits to its participants.
question
What is producer surplus?
answer
The amount of money a firm gets from producing a profit-maximizing level of output.
question
What happens in the long run if there is a positive economic profit?
answer
It creates an incentive for others to join the industry.
question
What happens to the supply curve when other firms join an industry?
answer
The supply curve shifts to the right.
question
With more firms joining an industry, at what point will the supply curve stop shifting to the right?
answer
When price reaches the minimum point on the LAC curve or when all firms move to the capital stock size.
question
What makes competitive markets attractive to society as a whole?
answer
Price is equal to marginal cost, price is equal to the minimum point on the long run average cost curve, all producers earn only a normal rate of profit.
question
What is attractive about price being equal to marginal cost?
answer
The last unit of output consumed is worth the same to the buyer as the resources required to produce it.
question
What is attractive about price being equal to the minimum point of the long run average cost curve?
answer
There is no less costly way of producing the product.
question
What is attractive about all producers earning only a normal rate of profit?
answer
The public doesn't pay any more than what it cost the firms to serve them.
question
What is the long run supply curve for Constant Cost Industries?
answer
a horizontal line at the minimum value of the LAC curve.
question
What is the long run supply curve Increasing Cost Industries?
answer
Upward sloping
question
What is the long run supply curve for Decreasing Cost Industries?
answer
downward sloping
question
What is Pecuniary Diseconomy?
answer
the rise in production cost when an expansion of industry outputs causes a rise in the prices input
question
What is the curve for Pecuniary Diseconomy?
answer
An upward sloping long run industry supply curve
question
What is Pecuniary Economy?
answer
the prices of inputs fall with expanding industry output.
question
What is the curve for Pecuniary Economy?
answer
A downward sloping long run industry supply curve
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