question
Profit
answer
the difference between total revenue and total cost
question
normal profit
answer
Opportunity cost of capital
-equivalent to implicit cost
-earned if economic profit is zero
-firm can earn positive economic profit if it earns more than its opportunity cost
-equivalent to implicit cost
-earned if economic profit is zero
-firm can earn positive economic profit if it earns more than its opportunity cost
question
Entrepreneurs only start business if the...
answer
Prospect of earnings is greater than the alternative use of resources
question
Market structure
answer
the number and relative size of firms in an industry
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Perfect competition
answer
No buyer or seller has market power
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Oligopoly
answer
Few firms, each having considerable market power
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Duopoly
answer
Market with 2 firms
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Monopoly
answer
Market with one firm only
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Characteristics of perfect competition
answer
-many firms compete for consumer purchases
-product of each firm identical
-low entry barriers make it easy to get into business
-no firm has any market power, can't manipulate price. They are price takers
-horizontal demand curve
-product of each firm identical
-low entry barriers make it easy to get into business
-no firm has any market power, can't manipulate price. They are price takers
-horizontal demand curve
question
The production decision
answer
-no pricing decisions, firms take market price
-no quality decisions, all products identical
-only decision left is the production decisions, how much to produce
-no quality decisions, all products identical
-only decision left is the production decisions, how much to produce
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The goal of the production decision
answer
Maximize profits, not revenues
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Marginal cost (MC)
answer
the increase in total cost associated with a one-unit increase in production
question
For perfect comp, marginal revenue is _______ to price, the added amount received from selling one more unit
answer
Equal
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If p> MC
answer
Increase output and profits will grow
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If p<MC
answer
Decrease output and loses will go away
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The shutdown decision
answer
a short-run decision not to produce anything during a specific period of time because of current market conditions
-does not eliminate all cost
-fixed cost must be paid even if all output ceases
-if firm makes losses, it can't pay all its fixed cost and its variable costs
-firms lose less by shutting down if losses from continuing production exceed fixed costs
-does not eliminate all cost
-fixed cost must be paid even if all output ceases
-if firm makes losses, it can't pay all its fixed cost and its variable costs
-firms lose less by shutting down if losses from continuing production exceed fixed costs
question
Shutdown point
answer
Output where price=minimum AVC
question
The investment decision
answer
The decision to build, buy, or lease plants and equipment or to enter or exit an industry
-long run decision
-long run decision
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A change that lowers cost will cause supply to..
answer
Shift right
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A change that raises cost will cause supply curve to..
answer
Shift left
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Impact of taxes on business decisions
answer
If tax increases MC, the firm will decrease output. If not, it will just decrease profits
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Economic cost
answer
the value of all resources used in production, whether or not they receive an explicit payment
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Marginal revenue (MR)
answer
Change in total revenue that results from a one unit increase in quantity sold
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Marginal revenue equation
answer
change in total revenue / change in output
question
Short run determinants
answer
price of factor inputs, technology, expectations, taxes and subsidies
-if supply changes, supply curve will shift
-if supply changes, supply curve will shift
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