question
What is the firms goal?
answer
To maximize profit
question
How do you solve to find the profit?
answer
Total Revenue-Total Cost
question
What is the Total Revenue?
answer
The amount a firm receives from the sale of its output
question
What is the Total Cost?
answer
The market value of the inputs a form uses in production
question
What is an Explicit cost?
answer
Require an outlay of money *Paying wages to workers
question
What is an Implicit Cost?
answer
Do not require a cash outlay *The opportunity cost of the owner's time
question
Both explicit or implicit matter?
answer
True; The cost of something is what you give up to get it
question
How do you find the Accounting Profit?
answer
Total Revenue - Total Explicit Cost
question
How do you find the Economic Profit?
answer
Total Revenue - Total Cost (both explicit and implicit)
question
How is accounting profit and economic profit different?
answer
Accounting profit ignores implicit costs, so its higher than economic profit
question
Production function shows the relationship between?
answer
The quantity of inputs used to produce a good and the quantity of outputs of that good
question
Production function can be represented by?
answer
A table, equation, or graph
question
What is the Marginal product?
answer
Any input is the increase in output arising from an additional unit of that input, holding all other inputs constant
question
Marginal product of labor
answer
^Q / ^L
question
Why is MPL important?
answer
Rational people think at the margin
question
What is Diminishing marginal production?
answer
The marginal product of an input declines as the quantity of the input increases (other things equal)
question
What is Marginal Cost?
answer
Is the increase in Total Cost from producing one more unit MC=^TC/^Q
question
What are Fixed Costs?
answer
Do not vary with the quantity of output produced *Cost of equipment, loan payments, rent
question
What are Variable Cost?
answer
Vary with the quantity produced *Cost of material
question
Total Cost (TC) is equal to
answer
Fixed Cost + Variable Cost
question
What is the Average Total Cost equal to?
answer
The total cost divided by the quantity of output ATC= Total Cost / Quantity
question
What is the Efficient Scale?
answer
The quantity that minimizes ATC
question
When MC < ATC
answer
ATC is falling
question
When MC > ATC
answer
ATC is rising
question
The MC Curve crosses the ATC curve at?
answer
The ATC curve's minimum
question
What is true about the Short Run?
answer
Some inputs are fixed these are fixed *Factories, land
question
What is true about the Long Run?
answer
All inputs are variable *Firms can build more factories or sell existing ones
question
The firm can change to a different factory size in the?
answer
Long run, but not in the short run
question
In the economies of scale...
answer
The ATC falls as Q increases
question
Constant returns to scale at?
answer
ATC stays the same as Q increases
question
In the Diseconomies of scale?
answer
The ATC rises as Q increases
question
Economies of scale occur when increasing production allows greater specialization..
answer
Workers more efficient hen focusing on a narrow task * more common when Q is low
question
Diseconomies of scale are due to?
answer
coordination problems in large organization management becomes stretched, can't control costs More common when Q is high
question
What is a characteristic of Perfect Competition?
answer
Many buyers and many sellers
question
What is a characteristic of Perfect Competition?
answer
The goods offered for sale are largely the same
question
What is a characteristic of Perfect Competition?
answer
Firms can freely enter or exit the market
question
Each buyer and seller is a?
answer
Price taker - Takes the price as given
question
How do you calculate Total Revenue?
answer
P X Q
question
How do you calculate Average Revenue?
answer
TR/Q = P
question
Marginal Revenue is the?
answer
The change in TR from selling one more unit MR= ^ TR/ ^Q
question
In a perfectly competitive firm it can?
answer
Keep increasing its output without affecting the market price
question
MR= P is only true when?
answer
Firms in perfectly competitive markets
question
MR > MC
answer
Increase Q to raise profit
question
MR < MC
answer
Reduce Q to raise profit
question
MR = MC
answer
at the profit-maximizing Q
question
The MC curve is the?
answer
Firm's supply curve
question
Stay open is when?
answer
A short-run decision to remain open and continue to produce when P is less than ATC but greater than AVC *Still produce even when making a loss
question
Shutdown is when?
answer
A short-run decision not to produce produce anything because of market conditions
question
Exit happens when?
answer
A long-run decision to leave the market
question
What is the cost of shutting down?
answer
Revenue loss = TR
question
What are the benefits of shutting down?
answer
Cost savings = VC (firm must still pay FC) TR < VC
question
Firms decision rule is?
answer
Shut down if P < AVC
question
If P > AVC?
answer
Then firm produces Q where P=MC
question
If P < AVC?
answer
Then Firms shuts down (Produces Q = 0)
question
How do you define Sunk Cost?
answer
A cost that already been committed an docent be recovered
question
Why is FC a sunk cost?
answer
The firm must pay its fixed costs whether it produces or shuts down
question
New firm will only enter the market if?
answer
It is profitable to do so TR > TC
Enter if P > ATC
Enter if P > ATC
question
Market Supply Assumption?
answer
All existing firms and potential entrants have identical costs
question
Market Supply Assumptions?
answer
Each firm's cost do not change as other firms enter or exit the market
question
Market Supply Assumptions?
answer
The number of firms in the market is..Fixed in the short run (FC) and Variable in the long run (free entry and exit)
question
As long as P >- AVC?
answer
Each firm will produce its profit-maximizing quantity, where MR=MC
question
Long-run equilibrium is?
answer
The process of entry or exit is complete--remaining firms earn zero economic profit
question
Zero economic profit occurs when?
answer
P=ATC
question
Since firms produce where _____ the Zero profit condition is _____?
answer
P=MR=MC; P=MC=ATC
Long run is P= Minimum ATC
Long run is P= Minimum ATC
question
In zero-profit equilibrium?
answer
Firms earn enough revenue to cover these costs, accounting profit is positive
question
The LR market supply curve is horizontal if?
answer
All firms have identical costs, and costs do not change as other firms enter or exit the market
question
If P rises, firms with lower costs enter the market before?
answer
Those with higher costs; Supply curve slopes upward
question
What is a monopoly?
answer
Is a firm that is the sole seller of a product without close substitutes
question
What is market power in monopoly?
answer
The ability to influence the market price of the product it sells. *A competitive firm has no market power
question
What is the main cause of monopolies?
answer
Barriers to entry
question
Three sources of barriers to entry?
answer
A single firm owns a key resource *DeBeers owns most of the world's diamond mines
question
Three sources of barriers to entry?
answer
The govt gives a single firm the exclusive right to produce the good *copyright laws
question
Three sources of barriers to entry?
answer
Natural monopoly
question
Natural monopoly is?
answer
A single firm can produce the entire market Q at lower cost than could serval firms
question
A competitive firm is a _________, can sell as much as it wants at the market price?
answer
Price-taker
question
Output effect is when?
answer
Higher output raises revenue
question
Price effect is when?
answer
Lower price reduces revenue
question
Like a competitive firm, a monopolist _________ profit by producing the quantity where ___________
answer
Maximizes; MR=MC
question
The profit-maximizing Q is where?
answer
MR=MC
question
With a competitive firm, the monopolist's profit equals?
answer
(P-ATC) x Q
question
A monopoly firm is?
answer
Price-maker; not a price taker
question
There is no ________ curve for monopoly?
answer
Supply
question
What is price discrimination?
answer
Selling the same good at different prices to different buyers
question
A firm can increase profit by charging a higher price to buyers with?
answer
Higher willingness to pay (WTP)
question
In the real world, perfect price discrimination is not possible, why?
answer
No firm knows every buyer's WTP & Buyers do not announce it to sellers
question
Marginal cost pricing?
answer
P=MC
question
Average cost pricing?
answer
P=ATC
question
Public ownership example?
answer
U.S. Postal Service; less efficient since no profit motive to minimize costs
question
Public policy toward monopolies?
answer
Doing nothing; the foregoing politics all have drawback so the best policy may be no policy
question
Oligopoly is when?
answer
Only a few sellers offer similar to identical products
question
Monopolistic competition is when?
answer
Many firms sell similar but not identical products
question
What is the difference between perfect competition and monopoly?
answer
Perfect competition many firms, identical products and monopoly is one firm
question
What are characteristics of monopolistic competition?
answer
Many sellers, product differentiation, free entry and exit
question
What is the product-variety externality?
answer
Surplus consumers get from the introduction of new product
question
What is business-stealing externality?
answer
Losses incurred by existing firms when new firms enter market
question
What is concentration ratio?
answer
The percentage of the market's total output supplied by its four largest firms
question
The higher the concentration ratio?
answer
the less competition
question
What is an oligopoly?
answer
A market structure in which only a few sellers offer similar or identical products *Video game system
question
What is the strategic behavior in oligopoly?
answer
A firm's decisions about P or Q can affect other firms and cause them to react
question
What is the game theory?
answer
The study of how people behavior in strategic situations
question
Collusion is when?
answer
An agreement among firms in a market about quantities to produce or prices to charge
question
Cartel is a?
answer
Group of firms acting in unison (t-mobile and verizon in the outcome collusion)
question
Why do they exist if they are illegal?
answer
Because it is voluntary but nobody does because they are to powerful
question
When cartel members come together and collude they essentially form a?
answer
Monopoly
question
Why is it difficult for oligopoly firms to form?
answer
Because they have to uphold their agreements instead of the incentive to cheat
question
Why is it not in their interest to continue cheat?
answer
Because they will continue to lose money
question
What is a Nash equilibrium?
answer
A situation in which economic participants interacting with on another each choose their best strategy given the strategies that all the other have have chosen
question
If your doing this, what is your best response?
answer
Nash equilibrium
question
What is the oligopoly output effect?
answer
If P>MC, increasing output raises profits
question
What is the oligopoly price effect?
answer
Raising output increases market quantity, which reduces price and reduces profit on all units sold
question
If output effect > price effect?
answer
The firm increases production
question
If price effect > output effect?
answer
The firm reduces production
question
What is dominant strategy?
answer
A strategy that is best for a player in a game regardless of strategies chosen by the other players
question
What is prisoners' dilemma?
answer
A game between two captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
question
Market with two firms is called?
answer
Duopoly
question
If two firms are going against each other what is the outcome?
answer
Because for perfect competition profit goes to zero
question
If two firms are going against each other in a monopoly?
answer
Because the monopoly wants to make the most money possible
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