question
Fixed Cost
answer
(also called total fixed cost) a cost that does not vary with output
question
variable costs
answer
(also called total variable cost) a cost that varies with the level of output
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Total Cost
answer
fixed cost + variable cost
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Marginal Cost (MC)
answer
the additional cost of each unit of output a firm produces. It is the ratio of change in total cost to the change in quantity of output.
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Average Fixed Cost
answer
Total Fixed cost / Quantity of output (always decreasing)
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Average variable Cost (AVC)
answer
Total Variable cost / Quantity of output
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Average total cost (ATC)
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Total Cost / Quantity of Output (also note that = average fixed cost + Average Variable cost)
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Perfect Competition Four Components
answer
1. many small sellers
2. many small buyers
3. Homogenous products (same product)
4. Perfect Information
2. many small buyers
3. Homogenous products (same product)
4. Perfect Information
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(Perfect Competition) firms are price takers
answer
price is determined by the interaction of supply and demand
buyers and sellers trade at market price
buyers and sellers trade at market price
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(Perfect Competition) Firms try to Maximize
answer
profit
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profit
answer
TR-TC
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(Perfect Competition) Firms choose the...
answer
profit maximizing Quantity (Q*)
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profit-maximizing quantity
answer
produce as long as MR>MC stop when MR=MC (MR=P)
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If P>min average cost
answer
Produce where demand=MC firm will see economic profit
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if P=min average cost
answer
produce where P=MC and TR=TC , looks like profit of 0 but there are opportunity costs
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when TR=TC
answer
firms earn normal profit
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If p<min average cost
answer
firms are doing worse than normal profit
Two decisions-
1. think about remaining in or exiting market (long run decision
2. in short run decide wether to shut down or not
Two decisions-
1. think about remaining in or exiting market (long run decision
2. in short run decide wether to shut down or not
question
Shut Down
answer
if P < AVC and Q*=0
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Efficiency 7 parts
answer
1. explicit and implicit costs
2. functions of price
3. long run equilibrium
4. cost savings
5. consumer and producer surplus
6. efficiency
7. taxes
2. functions of price
3. long run equilibrium
4. cost savings
5. consumer and producer surplus
6. efficiency
7. taxes
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Explicit Costs
answer
money going from one account to another
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implicit costs
answer
opportunity costs , includes normal profit (what you could have made in your second choice)
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Accounting profit
answer
total revenue - explicit costs
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Economic profit
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total revenue - explicit costs - implicit costs
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Accounting Profit and Economic profit realtionship
answer
Accounting profit is always larger > than Economic (because Econ applies implicit costs and b/c accounting is part of Econ's formula)
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Functions of Price (two important factors)
answer
1. rationing
2. allocative
2. allocative
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rationing
answer
short run scenario
we have stuff who is going to get it
(other ways of rationing)⬇️
waiting - if you're in the line you get it, if they run out you don't
lottery -
performance assessment - deserving of the resource (usually a costly resource)
we have stuff who is going to get it
(other ways of rationing)⬇️
waiting - if you're in the line you get it, if they run out you don't
lottery -
performance assessment - deserving of the resource (usually a costly resource)
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allocative
answer
price -econ profits
- Econ losses
- Econ losses
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Long run equilibrium of price
answer
economic profit occurs is TR>TC
- when economic profit occurs new firms will want to enter the industry
---> supply increases
--->price lowers
If P is lower than MC/AC intersection no economic profit
if there is no more economic profit, firms will enter until P*=min ATC (normal Profit)
- when economic profit occurs new firms will want to enter the industry
---> supply increases
--->price lowers
If P is lower than MC/AC intersection no economic profit
if there is no more economic profit, firms will enter until P*=min ATC (normal Profit)
question
Firms in perfect competition
answer
- don't have control over price
- you choose your profit maximizing quantity
- If you have economic profit its temporary and firms will enter and drive price down
----> in this case your options are to cut costs or get out of differentiating products
- you choose your profit maximizing quantity
- If you have economic profit its temporary and firms will enter and drive price down
----> in this case your options are to cut costs or get out of differentiating products
question
Predicament for firms in perfect competition
answer
- choose q*
- keep costs down
(if you can produce more cheaply doesn't effect market price you will just make way more profit than competitors
or
(get out of perfect competition by differentiating your product)
- keep costs down
(if you can produce more cheaply doesn't effect market price you will just make way more profit than competitors
or
(get out of perfect competition by differentiating your product)
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q (Q)
answer
profit maximizing quantity
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Consumer Surplus
answer
difference between what the buyers are willing to pay for the good vs what they actually pay (p)
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Producer Surplus
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difference between what the sellers are willing to sell for an what they actually get (p)
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market equilibrium is the q that maximizes
answer
producer and consumer surplus
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producer + consumer surplus =
answer
total surplus
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Market Equilibrium is Efficient b/c
answer
- price past equilibrium either price would be too low for seller or too high for buyer
- price before creates DWL
- price before creates DWL
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Size of DWL depends on
answer
Elasticity
question
Burden of Tax
answer
on buyers -> New Price of buyers - old eq price / tax
on sellers -> old eq price - New Price of sellers / tax
on sellers -> old eq price - New Price of sellers / tax
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The burden of tax depends on elasticity
answer
which ever side of the market is more elastic has more burden
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Effect of taxes
answer
Q: decreases
P: increases
(p buyers rises , p of sellers lowers)
P: increases
(p buyers rises , p of sellers lowers)
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Tax effect on Surplus
answer
CS: lowers
PS: lowers
+ dead weight loss (DWL)
PS: lowers
+ dead weight loss (DWL)
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Purpose of taxes
answer
1. gov needs revenue
2. a want to decrease q for certain goods
2. a want to decrease q for certain goods
question
Considerations when imposing taxes
answer
if demand is elastic, dramatic decrease in q* will happen
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