question
Short run
answer
- the time period in which there is at least one fixed input
question
Long run
answer
- all inputs are variable; anything can be changed.
question
Explicit costs
answer
- the cost of externally supplied resources. Labor would be an example.
question
Implicit costs
answer
- the cost of internally supplied resources. Harder to quantify.
question
Total Physical Product(TPP)
answer
is the amount of output produced, so it can also be thought of as Q.
question
Average Physical Product (APP)
answer
is the TPP divided by a particular input. In this example, we can use Labor (L) as the input.
question
Marginal Physical Product (MPP)
answer
is the change in TPP resulting from using one additional unit of an input.
question
Marginal cost
answer
the addition to total cost as a result of producing one additional unit of output.
question
Average total cost (AC) = TC/Q.
answer
. It includes both fixed and variable cost, so the TC curve will be above the TVC curve, also with a U-shape.
question
Cost and production are highly related. For example, if a firm is producing efficiently, their cost per unit will be lower.
answer
...
question
Short-run cost functions
answer
- Total variable costs (TVC) - the firm's spending on inputs that change as output increases.
- Total fixed costs (TFC) - the firm's spending on inputs that do not change as output increases.
- Total cost (TC) = TVC + TFC
- Total fixed costs (TFC) - the firm's spending on inputs that do not change as output increases.
- Total cost (TC) = TVC + TFC
question
If inputs are doubled and output more than doubles
answer
- increasing returns to scale
question
If inputs double and output doubles
answer
- constant returns to scale.
question
If inputs double and output less than doubles
answer
decreasing returns to scale.
question
Perfect Competition
answer
Generally an unattainable model in the real world, but useful as a benchmark of comparison.
question
Characteristics of Perfect Competition
answer
- Many buyers and sellers - no rivalry, no one firm has any control over the market.
- Homogeneous product - products are identical.
- No barriers to entry and exit - perfect mobility of resources.
- Perfect information - all buyers and sellers know what all other buyers and sellers are doing.
- Homogeneous product - products are identical.
- No barriers to entry and exit - perfect mobility of resources.
- Perfect information - all buyers and sellers know what all other buyers and sellers are doing.
question
Firm's demand curve
answer
Industry price is determined by supply and demand (Figure 1, p. 198), and the individual firm takes the industry price as a given.
question
Key assumption
answer
the firm can sell whatever they bring to the marketplace at the industry price. As a result, the firm's demand curve is horizontal (P = MR).
question
Total revenue
answer
= P x Q
question
Marginal revenue
answer
= revenue gained from selling one additional unit of output
question
Average revenue
answer
= TR / Q
question
Where will the firm produce?
answer
In the short run, the firm's only decision is to produce or not produce. In the long run, the firm has the option to exit the market. Note Figure 2 (p. 199) to consider different levels of production that the firm could choose to produce. Note importance of MR = MC.
question
Long-run conditions
answer
In the short- run, we have seen that the firm can have positive economic profits, negative economic profits, or economic profits = 0. See Figure 8 (p. 206) to see the progression from short run to long run. In the short run, price = $3 per bushel, which is more than AC, so in the short run, P = AC, and economic profits > 0. Entry of new firms will occur, shifting the industry supply curve to the right, which causes price to fall to 2.25. at that point, P is still > AC. Entry will continue until we get to Figure 9 (p. 207), where P = AC. No further incentive for movement, long run is reached.
question
Efficiency Criteria
answer
- Allocative - are resources being allocated as efficiently as possible? Criteria is met if P = LMC.
- Scale - Is the firm producing at the minimum point of its LAC curve? If so, the firm is minimizing its costs.
- Equity - are long-run economic profits = 0?
- Scale - Is the firm producing at the minimum point of its LAC curve? If so, the firm is minimizing its costs.
- Equity - are long-run economic profits = 0?
question
Perfect competition meets
answer
all three criteria; the firm is operating at maximum efficiency, and consumers are getting maximum amounts of product, available at minimum prices
question
Monopoly Characteristics
answer
- Single Seller
- No close substitutes
- High Barriers to Entry
- No close substitutes
- High Barriers to Entry
question
Causes of Monopoly
answer
- Patents - give an inventor exclusive rights to a product or a process.
- Control of Key Input(s)
- Government Restrictions - can give a particular firm an exclusive franchise to sell a particular product.
- Technical Superiority
- Economies of Scale/Large Sunk Costs.
- Control of Key Input(s)
- Government Restrictions - can give a particular firm an exclusive franchise to sell a particular product.
- Technical Superiority
- Economies of Scale/Large Sunk Costs.
question
Is monopoly ever a good thing?
answer
- In theory, it could lead to greater innovation if the firm has incentive to make better (and more profitable) products.
- - Natural monopolies can be more cost effective than forcing competition.
- - Natural monopolies can be more cost effective than forcing competition.
question
Long-run monopoly
answer
If the firm succeeds in keeping firms out of its monopoly situation, the short run profits can continue indefinitely, into the long run.
question
Efficiency Criteria
answer
- Allocative - is P = LMC? No.
- Scale - is the firm producing at the minimum point on its LAC curve? It can do so, but there is nothing forcing it to. Maybe
- Equity - are LR economic profits = 0? No
- Scale - is the firm producing at the minimum point on its LAC curve? It can do so, but there is nothing forcing it to. Maybe
- Equity - are LR economic profits = 0? No
question
Monopolistic Competition
answer
Characteristics:
- Many Sellers
- Low Barriers to Entry
- Differentiated Product
- Role of Non-price Competition
- Many Sellers
- Low Barriers to Entry
- Differentiated Product
- Role of Non-price Competition
question
Short-run output determination
answer
Note that the graph looks similar to the monopoly graph, but the demand curve is more elastic, due to greater availability of substitutes. In the figure, the firm again produces where MR = MC, and P > AC, so economic profits are possible in the short run.
question
What will happen as we approach the long run?
answer
- It becomes increasingly harder for the firm to continue to differentiate their product.
- More firms will enter the market, particularly if profits were made in the short run. This will affect the firm's revenue, but also affect their costs and efficiency. More firms in the market means that the overall business will be divided between more firms, which could lead to excess capacity in the industry.
- More firms will enter the market, particularly if profits were made in the short run. This will affect the firm's revenue, but also affect their costs and efficiency. More firms in the market means that the overall business will be divided between more firms, which could lead to excess capacity in the industry.
question
Long run output determination
answer
Note that P = LAC, meaning economic profits = 0 in the long run. Also. The firm is clearly not able to minimize its costs, which would occur at point M. Why? Since the firm is operating with excess capacity, they are only able to produce 10,000 gallons, rather than the preferred level of 15,000.
question
Efficiency Criteria for Long Run output determination
answer
Allocative - Is P = LMC ? No
Scale - Is firm producing at minimum point
On LAC curve? No
Equity - Are LR economic profits = 0 ?Yes
Scale - Is firm producing at minimum point
On LAC curve? No
Equity - Are LR economic profits = 0 ?Yes
question
Oligopoly
answer
Characteristics:
- Few Sellers
- Homogeneous or Differentiated Product
- High Barriers to Entry
Importance of Rivalry (mutual interdependence)
- Few Sellers
- Homogeneous or Differentiated Product
- High Barriers to Entry
Importance of Rivalry (mutual interdependence)
question
Mutual interdependence
answer
is the most important characteristic in oligopoly. Since there are only a few firms in the market if one firm acts, the other firms (its rivals) are likely to react. One firm's gain in market share is likely another firm's loss.
question
Key assumption foe oligoply
answer
: rivals will match price cuts; rivals will not match price increases.
question
Cartels
answer
An oligopolistic industry cooperates in an attempt to act as a monopoly, raising price and restricting output. Consider OPEC (Organization of Petroleum Exporting Countries): in the early 1970's, several large countries, including the US, were using more oil and gas than they were producing. Supply was plentiful, the product was largely homogeneous, meaning they could only compete on price
question
In the long-run, three factors hurt OPEC:
answer
1) Supply from domestic and other sources increased, reducing dependency on foreign oil.
2) Demand decreased and became more elastic, as substitutes increase.
3) Internal problems for OPEC, as the long-run goals of the various nations didn't align.
2) Demand decreased and became more elastic, as substitutes increase.
3) Internal problems for OPEC, as the long-run goals of the various nations didn't align.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
