ECP3703 exam 1 - Assignment Essays

question

Law of Demand

answer

the lower the price, the greater the quantity demanded
inverse

question

Law of Supply

answer

the

question

status goods are affected by law of demand

answer

bc the good itself changes

question

substitution effect

answer

when consumers react to an increase in a good's price by consuming less of that good and more of other goods
negative when price increases (switch = less demand)
positive when the price decreases
ALWAYS OPPOSITE DIRECTION OF PRICE CHANGE

question

income effect

answer

when price of a good changes, the purchasing power changes

question

normal goods

answer

income effect direction is always opposite to price change

question

inferior goods

answer

income effect is always the same direction as price change

question

giffen goods

answer

demand is upward sloping, price increases and demand increases

question

quantity demanded is ONLY affected by

answer

price

question

demand function

answer

Qd = a − (b × P)

question

factors affecting demand

answer

- change in income
- price of related goods
- future prices
- tastes/preferences
- number of demanders
- market/economic conditions

question

demand function + vars

answer

Qd = a − (b × P) + (c × PSKIRTS) + (d × INCOME)

question

law of supply: the higher the price of the good, the higher the

answer

qty supplied

question

supply slope:

answer

The change in quantity supplied caused by a $1 change in price of a pair of jeans

question

supply equation

answer

Qs= r + (s× P)

question

factors affecting supply

answer

state of nature
qty of suppliers
expected future price
technology
price of related goods(comp and subst in production)
COST

question

SOLVE FOR EQUILIBRIUM (ALGEBRAICALLY)

answer

Equal D and S functions
solve for P

question

consumer surplus

answer

what a consumer is willing to pay vs what he actually pays

question

producer surplus

answer

what a producer is willing to sell for vs what he actually pays for

question

if both increase=

answer

price is ambiguous
qty increases

question

if opposite effects on S and D curves

answer

qty is ambiguous

question

price ceiling goes

answer

below equilibrium
rent top
shortage

question

price floor goes

answer

above equilibrium
min wage
surplus

question

production is affected by

answer

qty of inputs, cost of inputs, production technology, managers effort to minimize cost

question

increasing return of scale
decreasing ( swuare root of inputs)

answer

1 percent input causes a more than 1 percent overall output

question

short run

answer

at least one input is fixed
capital (k) is fixed

question

how are marginal cost and product related in the short run?

answer

MC= W/MPl

question

produce one more unit of output with labor

answer

1/MPl times Wage

question

MC VS MPl CURVES

answer

When q increases, more labor is employed and 𝑀𝑃𝐿 increases causing 𝑀𝐶 to decline.

question

MC shape in short run

answer

𝑀𝐶 is U-shaped (decreasing and then increasing) while 𝑀𝑃𝐿 is inverse U-shaped.

question

ATC AND AVC CURVE SHAPED

answer

Both the AVC and the ATC curves are U-shaped.
due to the shape of 𝑀𝑃𝐿 (and also 𝑀𝐶).
• The first few units are expensive to produce (MC is high and 𝑀𝑃𝐿 is low) because specialization has not yet occurred.

question

if marginal is less than avg

answer

avg goes down

question

MC changes in response to increased fixed cost

answer

no change

question

factors of cost curves

answer

technology
economies or diseconomies of scale
input prices

question

how much input does LAC show if they are all variable?

answer

shows the minimum cost combination of inputs for each level of output LAC
it shows the lowest average cost for each amount of output

question

does it match the atc curves

answer

it shows the lowest average cost for each amount of output
individual ATC for each output IS NOT the minimum being the point of LAC
no it doesnt

question

minimum efficient scale

answer

The lowest rate of output at which a firm takes full advantage of economies of scale
The amount of output at which the LAC first reaches its minimum.

question

if the ATC in the short run changes,

answer

the LAC changes in the same direction

question

production function

answer

100min{𝐾,𝐿}

question

does it match the short run curves

answer

...

question

how much input does LAC show if they are all variable?

answer

...

question

short run

answer

at least one input is fixed

question

perfect competition

answer

Many buyers and sellers• No barriers to entry• Products are homogeneous (identical)• Buyers and sellers have perfect information about the products• No transactions costs
MR=P

question

barriers of entry examples

answer

are any factor which makes it difficult for new firms to enter a market.
limited resources, trademark/patents
do not include typical capital costs

question

demand of competitive firms

answer

market demand is downward sloping
individual demand= price taker= perfectly elastic

question

TOTAL PROFIT

answer

total revenue- opp cost

question

firm makes an economic profit if

answer

P > ATC

question

Zero economic profit

answer

when total revenue= total costs

question

if a firm has economic loss

answer

profit maximization becomes loss minimization

question

shut doen when

answer

P<AVC
when mc=avc (minimum avc)

question

firm short run supply curve

answer

portion of MC above AVC

question

short run market supply

answer

equals sum of supply for all firms at x price

question

in a perfectly competitive market, when demand increases, in long run

answer

they produce at LRMC which increases qty produced thus make an economic profit
this attract firms to get in
it decreases price and goes back to 0 econ profit

question

short run demand increase:

answer

more input per firm VARIABLE
more supply per firm
profit

question

medium run demand increase

answer

firms adjust fixed inputs (capital) FIXED
more profits
no firms get in

question

medium run demand increase

answer

This stage occurs only if firms can increase and decrease fixed inputs before the entry of new firms.

question

when entry doesn't raise costs,

answer

LRS is flat

question

when entry does raise costs

answer

LRS is upward sloping

question

in the long run, after increasing M demand

answer

Managers maximize their profit by producing the quantity that sets long-run marginal cost (LMC) equal to MR. This profit-maximizing quantity exceeds the short-run profit-maximizing quantity.
the MC shifts right to LMC

question

the entry of new firms raises costs due to

answer

congestion
additional demand drives prices of input up

question

in the long run, after firms enter

answer

the new price with 0 profit lies above OG price

question

technology shifts

answer

MC curve to the right. it makes econ profit in short run but not in long run

question

overexpansion

answer

f firms cant change their scale of operations, they will have a loss in lr

question

the lowest price at which a firm remains open

answer

lowest point of vC

question

market power

answer

when the set the prices

question

Monopoly Characteristics

answer

no substitutes
barriers of entry
single seller

question

in a monopoly the MR

answer

doesn't equal the P

question

more output effect

answer

revenue increases due to higher demand (sell 1 more unit)

question

lower price effect

answer

revenue decreases bc you sell at a lower price

question

in a monopoly the MR

answer

is always less than P

question

in a monopoly, P equals

answer

MR=MC

question

elasticity

answer

how the qd changes when the price of a product changes
change in qd over change in p

question

when E =1 , MR

answer

is 0
low price effect and more output effect cancel each other out

question

when E >1, MR

answer

is positive
more output> low price effect

question

when E<1 , MR

answer

is negative
low price effect> more output

question

markup

answer

factor by which a firm's P is >than MC

question

monopoly when demand is inelastic

answer

never operate

question

large elasticity

answer

means flat D and MR curves
small markup

question

small elasticity

answer

steep MR and D
more markup

question

in the short run shut down if
in the long run shut down if

answer

P<AVC
P<ATC

question

In long run for Monopoly, other firms

answer

CANNOT ENTER
so price never goes back to ATC

question

types of barriers of entry

answer

copyright(to be the owner)/trademark(to brand)/patent(to produce),trade secret(production technology)
adv
sunk costs
control of raw materials
gov control
economies of scale

question

natural monopoly

answer

firm with economies of scale
the LRMC will decrease for the whole time until MR=LMC

question

total surplus in PC vs Monopoly
the price
the production
deadweight loss

answer

PC>M
M>PC
PC>M
only in Monopoly

question

in the long run, the Monolopy

answer

does not need to produce at min ATC (perfect comp does)
can have a profit as long as no firms enter

question

residual demand

answer

demand of dominant firm. market- competitive fringe

question

kink

answer

abrupt change in slope

question

competitive fringe is not willing to supply at

answer

low prices.
demand equals residual demand

question

slope of RD is flat bc

answer

it is more elastic
flatter than D

question

when SCF=D

answer

RD is 0

question

in a dominant market, when you sell more:

answer

the MR is greater for dominant firm when SCF is active bc they reduce supply. meaning that the lower price effect is less.
the MR is less when SCF shuts down

question

a dominant firm makimizes profit at

answer

RMR =MC and at a price where RD is

question

a dominant firm's marku will always be ----- than a monopoly due to its elasticity

answer

less

question

when P=D=RD

answer

the dominant firm has priced out the market for CF

question

differentiated products

answer

varieties of the same product
flavor/brand/cars/phones

question

horizontal vs vertical differentiation

answer

horizontal= quality is the same
vertical= quality is differetn

question

monopolistic competition short/long run

answer

in the short run they can make profit
in the long run they dont

question

Under perfect competition, the long run supply curve is upward sloping when entry does not raise costs.- A) True- B) False

answer

FALSE, the long run supply curve under perfect competition is horizontal or perfectly elastic, not upward sloping.

1 of 98

question

Law of Demand

answer

the lower the price, the greater the quantity demanded
inverse

question

Law of Supply

answer

the

question

status goods are affected by law of demand

answer

bc the good itself changes

question

substitution effect

answer

question

income effect

answer

when price of a good changes, the purchasing power changes

question

normal goods

answer

income effect direction is always opposite to price change

question

inferior goods

answer

income effect is always the same direction as price change

question

giffen goods

answer

demand is upward sloping, price increases and demand increases

question

quantity demanded is ONLY affected by

answer

price

question

demand function

answer

Qd = a − (b × P)

question

factors affecting demand

answer

- change in income
- price of related goods
- future prices
- tastes/preferences
- number of demanders
- market/economic conditions

question

demand function + vars

answer

Qd = a − (b × P) + (c × PSKIRTS) + (d × INCOME)

question

law of supply: the higher the price of the good, the higher the

answer

qty supplied

question

supply slope:

answer

The change in quantity supplied caused by a $1 change in price of a pair of jeans

question

supply equation

answer

Qs= r + (s× P)

question

factors affecting supply

answer

state of nature
qty of suppliers
expected future price
technology
price of related goods(comp and subst in production)
COST

question

SOLVE FOR EQUILIBRIUM (ALGEBRAICALLY)

answer

Equal D and S functions
solve for P

question

consumer surplus

answer

what a consumer is willing to pay vs what he actually pays

question

producer surplus

answer

what a producer is willing to sell for vs what he actually pays for

question

if both increase=

answer

price is ambiguous
qty increases

question

if opposite effects on S and D curves

answer

qty is ambiguous

question

price ceiling goes

answer

below equilibrium
rent top
shortage

question

price floor goes

answer

above equilibrium
min wage
surplus

question

production is affected by

answer

qty of inputs, cost of inputs, production technology, managers effort to minimize cost

question

increasing return of scale
decreasing ( swuare root of inputs)

answer

1 percent input causes a more than 1 percent overall output

question

short run

answer

at least one input is fixed
capital (k) is fixed

question

how are marginal cost and product related in the short run?

answer

MC= W/MPl

question

produce one more unit of output with labor

answer

1/MPl times Wage

question

MC VS MPl CURVES

answer

When q increases, more labor is employed and 𝑀𝑃𝐿 increases causing 𝑀𝐶 to decline.

question

MC shape in short run

answer

𝑀𝐶 is U-shaped (decreasing and then increasing) while 𝑀𝑃𝐿 is inverse U-shaped.

question

ATC AND AVC CURVE SHAPED

answer

question

if marginal is less than avg

answer

avg goes down

question

MC changes in response to increased fixed cost

answer

no change

question

factors of cost curves

answer

technology
economies or diseconomies of scale
input prices

question

how much input does LAC show if they are all variable?

answer

shows the minimum cost combination of inputs for each level of output LAC
it shows the lowest average cost for each amount of output

question

does it match the atc curves

answer

it shows the lowest average cost for each amount of output
individual ATC for each output IS NOT the minimum being the point of LAC
no it doesnt

question

minimum efficient scale

answer

The lowest rate of output at which a firm takes full advantage of economies of scale
The amount of output at which the LAC first reaches its minimum.

question

if the ATC in the short run changes,

answer

the LAC changes in the same direction

question

production function

answer

100min{𝐾,𝐿}

question

does it match the short run curves

answer

...

question

how much input does LAC show if they are all variable?

answer

...

question

short run

answer

at least one input is fixed

question

perfect competition

answer

Many buyers and sellers• No barriers to entry• Products are homogeneous (identical)• Buyers and sellers have perfect information about the products• No transactions costs
MR=P

question

barriers of entry examples

answer

are any factor which makes it difficult for new firms to enter a market.
limited resources, trademark/patents
do not include typical capital costs

question

demand of competitive firms

answer

market demand is downward sloping
individual demand= price taker= perfectly elastic

question

TOTAL PROFIT

answer

total revenue- opp cost

question

firm makes an economic profit if

answer

P > ATC

question

Zero economic profit

answer

when total revenue= total costs

question

if a firm has economic loss

answer

profit maximization becomes loss minimization

question

shut doen when

answer

P<AVC
when mc=avc (minimum avc)

question

firm short run supply curve

answer

portion of MC above AVC

question

short run market supply

answer

equals sum of supply for all firms at x price

question

in a perfectly competitive market, when demand increases, in long run

answer

they produce at LRMC which increases qty produced thus make an economic profit
this attract firms to get in
it decreases price and goes back to 0 econ profit

question

short run demand increase:

answer

more input per firm VARIABLE
more supply per firm
profit

question

medium run demand increase

answer

firms adjust fixed inputs (capital) FIXED
more profits
no firms get in

question

medium run demand increase

answer

This stage occurs only if firms can increase and decrease fixed inputs before the entry of new firms.

question

when entry doesn't raise costs,

answer

LRS is flat

question

when entry does raise costs

answer

LRS is upward sloping

question

in the long run, after increasing M demand

answer

question

the entry of new firms raises costs due to

answer

congestion
additional demand drives prices of input up

question

in the long run, after firms enter

answer

the new price with 0 profit lies above OG price

question

technology shifts

answer

MC curve to the right. it makes econ profit in short run but not in long run

question

overexpansion

answer

f firms cant change their scale of operations, they will have a loss in lr

question

the lowest price at which a firm remains open

answer

lowest point of vC

question

market power

answer

when the set the prices

question

Monopoly Characteristics

answer

no substitutes
barriers of entry
single seller

question

in a monopoly the MR

answer

doesn't equal the P

question

more output effect

answer

revenue increases due to higher demand (sell 1 more unit)

question

lower price effect

answer

revenue decreases bc you sell at a lower price

question

in a monopoly the MR

answer

is always less than P

question

in a monopoly, P equals

answer

MR=MC

question

elasticity

answer

how the qd changes when the price of a product changes
change in qd over change in p

question

when E =1 , MR

answer

is 0
low price effect and more output effect cancel each other out

question

when E >1, MR

answer

is positive
more output> low price effect

question

when E<1 , MR

answer

is negative
low price effect> more output

question

markup

answer

factor by which a firm's P is >than MC

question

monopoly when demand is inelastic

answer

never operate

question

large elasticity

answer

means flat D and MR curves
small markup

question

small elasticity

answer

steep MR and D
more markup

question

in the short run shut down if
in the long run shut down if

answer

P<AVC
P<ATC

question

In long run for Monopoly, other firms

answer

CANNOT ENTER
so price never goes back to ATC

question

types of barriers of entry

answer

copyright(to be the owner)/trademark(to brand)/patent(to produce),trade secret(production technology)
adv
sunk costs
control of raw materials
gov control
economies of scale

question

natural monopoly

answer

firm with economies of scale
the LRMC will decrease for the whole time until MR=LMC

question

total surplus in PC vs Monopoly
the price
the production
deadweight loss

answer

PC>M
M>PC
PC>M
only in Monopoly

question

in the long run, the Monolopy

answer

does not need to produce at min ATC (perfect comp does)
can have a profit as long as no firms enter

question

residual demand

answer

demand of dominant firm. market- competitive fringe

question

kink

answer

abrupt change in slope

question

competitive fringe is not willing to supply at

answer

low prices.
demand equals residual demand

question

slope of RD is flat bc

answer

it is more elastic
flatter than D

question

when SCF=D

answer

RD is 0

question

in a dominant market, when you sell more:

answer

the MR is greater for dominant firm when SCF is active bc they reduce supply. meaning that the lower price effect is less.
the MR is less when SCF shuts down

question

a dominant firm makimizes profit at

answer

RMR =MC and at a price where RD is

question

a dominant firm's marku will always be ----- than a monopoly due to its elasticity

answer

less

question

when P=D=RD

answer

the dominant firm has priced out the market for CF

question

differentiated products

answer

varieties of the same product
flavor/brand/cars/phones

question

horizontal vs vertical differentiation

answer

horizontal= quality is the same
vertical= quality is differetn

question

monopolistic competition short/long run

answer

in the short run they can make profit
in the long run they dont

question

Under perfect competition, the long run supply curve is upward sloping when entry does not raise costs.- A) True- B) False

answer

FALSE, the long run supply curve under perfect competition is horizontal or perfectly elastic, not upward sloping.

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