Microeconomics Unit 2 Exam Review

total cost (includes explicit and implicit costs) less than accounting profits because it includes implicit costs

cost that changes at each level of output

a period long enough for a firm to adjust the quantities of all resources that is employs, including plant capacity (enough time for existing firms to dissolve and leave the industry or for new firms to be created and enter the industry)
(all resources are variable)

a period too brief for a firm to alter its plant capacity yet long enough to permit a change in the degree to which the fixed plant is used (at least one resource is fixed)

a large size company can produce a product at a lower ATC than its competitors (Wal-Mart)

changing customer prices without regard to cost differences

MR=MC

four largest firms have 40% of market share (oligopoly)

pure competition, pure monopoly, oligopoly, and monopolistic competition

1) the relatively large number of sellers that each has; a small market share, there is no collusion, and firms that actions that are independent of each other

2) exhibit product differentiation through differences in attributes or features of products, services to customers, locations and accessibility, brand names and packaging, some control over price

3) entry into the industry or exit is relatively easy

4) there is nonprice competition in the form of product differentiation and advertising

5) monopolistically competitive firms are common

clothing stores, restaurants, grocery stores

1) it is composed of a few firms that dominate an industry

2) it may produce homogeneous or differentiated products

3) price makers (firms have control over price)

4) barriers to entry such as economies of scale or ownership, control over raw materials, patents, and pricing strategies, can explain the existence of oligopoly

5) some industries have become oligopolistic not from internal but from external factors such as mergers
6) The concentration in an industry among a few large producers can be measured in several ways: concentration ratio and herfindahal index

gives the percentage of an industry's total sales provided by the largest firms; if the 4 largest firms account for 40% or more of the industry's output, the industry is considered oligopolistic

the imprecise definition of the marker area and the failure to take into account interindustry competition and import competition

competition between 2 products associated with different industries

the competition that domestic firms encounter from the products and services of foreign producers

measures concentration more accurately because it accounts for the market share of each firm; it is the sum of the squared percentage market shares of all firms in the industry

the study of how people behave on strategic situations

1) kinked-demand model
2) collusive pricing
3) price leadership

1)there is no collusion

2) each firm behaves that if it lowers its price its rivals will lower their prices, but if it raises its price its rivals will not increase their prices. Therefore the firm is reluctant to change its price for fear of reducing its profits

3) price war: successive and continuous rounds of price cuts by rivals as they attempt to maintain their market shares

mutual interdependence indicates there is collusion among oligopoly firm to maintain or increase price

a form of covert collusion in which one firm initiates price changes and the other firms in the industry follow the lead

1) price cuts are easily duplicated

2)firms have more financial resources for advertising and product development

exists when a single firm is the sole producer of a product for which there are no close substitutes

1) single seller (a single firm is the sole producer of a specific good or the sole supplier of a service)

2) no close substitutes

3) price maker

4) blocked entry

5) nonprice competition

natural gas company, electric company, water company, cable TV company, local telephone company

General Motors, Ford, Chrysler

a single firm has the bulk of sales in a specific market

Intel, First Data Corp., De Beers, pro sports teams, railroad/airline, local bank, local movie theater, local bookstore

factors that prohibit firms from entering an industry

1) economies of scale

2) patents and license

3) the ownership or control of essential resources can effectively block entry into an industry

4) price cuts, advertising campaigns, producing excess capacity

give the inventor the exclusive right to use or allow others to use the invention

give a firm the exclusive right to provide a good or service

horizontal

downsloping

a situation which each firm's profit depends not entirely on its own price and sales strategy but also on those of other firms

self-interested behavior that takes into account the reactions of others

a group of producers that typically creates a formal agreement specifying how each member will produce and charge

1) differences in demand and cost among firms

2) number of firms in the arrangement

3) incentive to cheat

4) changing the economic conditions

5) potential for entry by other firms

6) legal restrictions and penalties

providing low-cost information to consumers that reduces search time and monopoly power, thus enhancing economic efficiency

manipulating consumers to pay higher prices, serving as a barrier to entry into an industry, and offsetting campaigns that raise product costs and prices

1) price cuts are easily duplicated

2) firms have more financial resources for advertising and product development

1) price

2) product characteristics

3) advertising

1) involves a very large number of large or small firms

2) produced a homogeneous or standardized product (a product identical to that of other producers, such as corn or cucumbers)

3) new firms can enter or exit the industry easily

agriculture

total revenue from the sale of a product divided by the quantity of the product sold (demanded); equal to the price at which the product is sold when all units of the product are sold at the same price

found by multiplying the product price by quantity demanded

the change in total revenue from the sale of one additional unit of output

change in total revenue divided by one-unit change in output

perfectly elastic

marginal revenue and price

inelastic

any output at which a competitive firm's total cost and total revenue are equal

1) should firm produce?

2) what amount)

3) what economic profit (loss) will be realized?

highly elastic

inelastic

1) compare total revenue and total cost
2) compare marginal revenue and marginal cost

an industry in which the expansion of industry output by the entry of the new firms increases the individual firm's cost curve (cost curve shifts upward)

an industry in which the expansion of industry output by the entry of new firms decreases the individual firm's cost curve (cost curve shifts downward)

1) resources are scarce
2) resources are productive
3) resources have alternative uses

the amount of other products that must be forgone or sacrificed to produce a unit of a product

the monetary payments or cash expenditures it makes to those who supply labor services, materials, fuel, and transportation services

cost of t-shirts, clerk's salary, utilities

the opportunity of using its self-owned, self-employed resources (the money payments that self-employed resources could have earned in their best alternative use)

forgone interest, forgone rent, forgone wages, and forgone entrepreneurial income

the payment made by a firm to obtain and retain entrepreneurial ability (the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm

total revenue minus economic costs

total revenue minus explicit cost

the total quantity, or total output, of a particular good produced

the extra output or added product associated with adding a unit of a variable resource to the production process (change in total product divided by change in labor input)

the output per unit of labor (total product divided by units of labor)

those costs that do not vary with changes in output

those costs that change with the level of output

rental payments, interest of firm's debts, insurance premiums

payments for materials, fuel, power, transportation services, most labor

the sum of fixed cost and variable cost at each level of output