question
accounting cost
answer
Actual expenses plus depreciation charges for capital equipment.
question
economic cost
answer
Cost to a firm of utilizing economic resources in production, including opportunity cost.
question
opportunity cost
answer
Cost associated with opportunities that are forgone when a firm's resources are not put to their best alternative use
question
Sunk cost
answer
Cost that has already been incurred and cannot be recovered (even if you shut down)
question
In the very short-run, all costs are
answer
fixed
question
In the very long run, all costs are
answer
variable
question
Fixed costs
answer
Costs that do not change with quantity.
Fixed costs can be avoided in the long run by exiting the industry
Fixed costs can be avoided in the long run by exiting the industry
question
Marginal Cost
answer
Equal to the increase in variable cost or the increase in total cost that results from an extra unit of output.
Formula: Change in TC/Quantity
Formula: Change in TC/Quantity
question
MC Vs AC
answer
- If MCAC, AC is increasing
- MC=AC at minimum AC Supply curve is from MC Initial decrease, then increase? Why? Profit is based on AC
- MC=AC at minimum AC Supply curve is from MC Initial decrease, then increase? Why? Profit is based on AC
question
cost curves
answer
There is an initial decrease in marginal cost because of efficiencies gain (aka hire people, bulk buy, specialize)
question
Reasons Average Costs Decline with Output (4 reasons)
answer
1. Economies of scale
2. Larger scale allows specialization
3. Larger scale provides greater flexibility for optimizing inputs
4. Scale might give the firm buying power to negotiate lower prices
2. Larger scale allows specialization
3. Larger scale provides greater flexibility for optimizing inputs
4. Scale might give the firm buying power to negotiate lower prices
question
Reasons Average Costs Increase Eventually (3 reasons
answer
1. Diseconomies of scale
2. Larger firms are more complex and harder to manage
3. Diminishing returns to inputs
2. Larger firms are more complex and harder to manage
3. Diminishing returns to inputs
question
Absolute Advantage
answer
Being able to produce more
question
Comparative Advantage
answer
Lower marginal costs/opportunity cost of producing (e.g. trucks to cars)
question
Average Revenue
answer
TR/Q = Price
question
Total Revenue with Inelastic Demand
answer
In inelastic demand a graph with X as Quantity and Y and Revenue, the shape is an upside down parabola (upside down U or a hill shape)
question
Total revenue with perfectly elastic demand
answer
In inelastic demand a graph with X as Quantity and Y and Revenue, the shape is a upward sloping diagonal line (like a supply or MC curve)
question
perfectly elastic demand curve
answer
What do we produce?
How much do we produce?
What is the lowest cost we can produce this at?
How much do we produce?
What is the lowest cost we can produce this at?
question
perfectly inelastic demand curve
answer
TR - TC
OR
𝑄(𝑃 − 𝐴𝐶)
OR
𝑄(𝑃 − 𝐴𝐶)
question
Firms Decisions
answer
Long Run:
If P>AC, produce
If P<AC, exit aka Produce 0
Short Run:
If P>AC, produce
If P<AC, check if P<AVC, if so, wait for long run
If P>AC, produce
If P<AC, exit aka Produce 0
Short Run:
If P>AC, produce
If P<AC, check if P<AVC, if so, wait for long run
question
Profit
answer
where MR=MC
question
Exit Rules
answer
Photo shows monopoly
question
Profit Maximizing Q
answer
Slope TR is MR
Slope of TC is MC
Slope of TC is MC
question
profit maximization
answer
If a firm is a price taker, then the firm takes the price of each unit as given, fixed, and immobile, thus MR = P = MC.
Essentially if it's not a monopoly, a firm is price taker because it takes the price of the market (no single buyer or seller can influence the price)
Essentially if it's not a monopoly, a firm is price taker because it takes the price of the market (no single buyer or seller can influence the price)
question
Profit maximization in pictures
answer
1. Price Taking
2. Product Homogeneity (perfect substitutes)
3. Free entry and exit
2. Product Homogeneity (perfect substitutes)
3. Free entry and exit
question
Price Takers
answer
A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.
question
Characteristics of Perfect Competition (4)
answer
AR = MR = P is less than ATC.
This firm would keep producing in the short run because P is greater than AVC
This firm would keep producing in the short run because P is greater than AVC
question
zero economic profit
answer
AR = MR = P is greater than both ATC (average total cost) and AVC (average variable cost)
question
Competitive firm incurring losses
answer
In a market with entry and exit, a firm enters when it can earn a positive long-run profit and exits when it faces the prospect of a long-run loss.
Thus, profits will drive entry, which drives down price (demand slopes down), driving down revenue (and profits), until there are zero economic profits in the market in the long run under perfect competition
Therefore, in the long run we will have that P=MC where MC=ATC
Thus, profits will drive entry, which drives down price (demand slopes down), driving down revenue (and profits), until there are zero economic profits in the market in the long run under perfect competition
Therefore, in the long run we will have that P=MC where MC=ATC
question
Competitive firm making a positive profit
answer
1) Economic profit is zero (earn a fair return)
2) no incentive to enter or exit
3) supply = demand
2) no incentive to enter or exit
3) supply = demand
question
Output and Profit in the Long Run
answer
the ability to alter the market price of a good or service by a seller or buyer
question
In equilibrium, what happens
answer
A company in a Monopoly
A consumer in a monopsony
A consumer in a monopsony
question
Market Power
answer
- Differentiated products
- Legal barriers to entry by rivals - Natural barriers to entry by rivals (e.g. Decreasing cost
- Unknown product information (i.e., quality)
- Legal barriers to entry by rivals - Natural barriers to entry by rivals (e.g. Decreasing cost
- Unknown product information (i.e., quality)
question
Price Searchers or Price Setters
answer
PC: P=MR=MF
M: P>MR=MC
M: P>MR=MC
question
Where does market power come from
answer
...
question
Perfect Competition vs Monopoly
answer
increases total revenue
because total quantity will increase by more than the price decrease
because total quantity will increase by more than the price decrease
question
Elasticity varies as you move along a linear demand
answer
decreases total revenue
because people will still want the good, they'll just pay less for it now. Quantity will increase by less than the price decrease
because people will still want the good, they'll just pay less for it now. Quantity will increase by less than the price decrease
question
When demand is elastic, a decrease in price
answer
Unity
question
When demand is inelastic, a decrease in price
answer
(P-MC)/P
OR
-1/Elasticity of Demand
OR
-1/Elasticity of Demand
question
Total revenue is maximized when elasticity is
answer
1. Price Regulation (ceilings, etc.)
2. Antirust laws (aka prevent mergers)
Price Regulation is risky because it is hard to set a smart price ceiling. You risk doing more harm than good
2. Antirust laws (aka prevent mergers)
Price Regulation is risky because it is hard to set a smart price ceiling. You risk doing more harm than good
question
Market Power/Learner Index Formula
answer
To capture some of the DWL and/or more of the available consumer surplus AKA Maximize Profits
question
Government approaches to social cost
answer
Charge each customer her WTP (aka absolute maximization, but incredibly hard to do)
Producer Surplus is Maximized & Consumer Surplus is Zero
Efficiency is the same as perfect competition because there is no DWL
Quantity produced = equilibrium aka perfect competition quantity
Cannot work if there is resale between customers
Producer Surplus is Maximized & Consumer Surplus is Zero
Efficiency is the same as perfect competition because there is no DWL
Quantity produced = equilibrium aka perfect competition quantity
Cannot work if there is resale between customers
question
Why do monopolists price discriminate?
answer
Charging different prices per unit for different quantities of the same good or service aka block pricing (e.g. utilities)
Exploits diminishing marginal utility
E.g. BOGO (bulk pricing is not counted because that usually assumes cost efficiency)
Exploits diminishing marginal utility
E.g. BOGO (bulk pricing is not counted because that usually assumes cost efficiency)
question
First Degree Price Discrimination
answer
Dividing consumers into two or more groups with separate demand curves and charging different prices to each group aka market segmentation (e.g. subscriptions with ads vs ad free, pink tax)
Inelastic or less elastic people pay more
Inelastic or less elastic people pay more
question
Second Degree Price Discrimination
answer
1. Quantity Decreases
2. Price Increases
3. Consumer Surplus Decreases
4. Producer Surplus Increases
5. There is Dead Weight Loss
2. Price Increases
3. Consumer Surplus Decreases
4. Producer Surplus Increases
5. There is Dead Weight Loss
question
Third Degree Price Discrimination
answer
A market structure in which a few large firms dominate a market.
Each firm's choice might affect the other firms' choices
Firms must act strategically
Each firm's choice might affect the other firms' choices
Firms must act strategically
question
Characteristics of a Monopoly
answer
Each player is doing the best given the actions/predicted actions of its opponents
no one has an incentive to change their action
Requires each player to correctly forecast what the other player is going to do.
no one has an incentive to change their action
Requires each player to correctly forecast what the other player is going to do.
question
Oligopoly
answer
Situation in which players (participants) make strategic decisions that take into account each other's actions and responses.
question
Nash Equilibrium
answer
Value associated with a possible outcome Nash equilibrium
question
Game
answer
Complete plan of action for playing a game
question
Payoffs
answer
Strategy that maximizes a player's expected payof
question
Strategy
answer
1. A Nash equilibrium exists
2. The Nash equilibrium is not socially optimal
3. Both would be better off if they did not choose the socially optimal point
4. Both have dominant strategies
2. The Nash equilibrium is not socially optimal
3. Both would be better off if they did not choose the socially optimal point
4. Both have dominant strategies
question
Optimal Strategy
answer
1. Total demand must be relatively inelastic
2. The cartel must have control of a majority of the supply
3. Need enforcement mechanisms for cheater
2. The cartel must have control of a majority of the supply
3. Need enforcement mechanisms for cheater
question
Characteristics of a Prisoner's Dilemma
answer
Maximum amount of money that a risk-averse person will pay to avoid taking a risk.
question
How do cartels work?
answer
the average of each possible outcome of a future event, weighted by its probability of occurring
question
Risk Premium
answer
...
question
expected value
answer
undefined
question
...
answer
undefined
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
