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Firm
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A....is an organization that uses inputs to produce outputs.
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Sole Proprietorship
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Firm has one owner, entitled to all the profit
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Partnership
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Firm has multiple owners, with profit divided according to their own ownership share.
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unlimited liability
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Both sole proprietorships and partnerships feature.......: No separation between firms and personal assets. ........for losses includes personal assets! 70% of new businesses fail.
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Corporation
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Ownership divided among shareholders
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Advantages of corporate ownership structure:
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Limited liability for losses (losses are limited to your investment in the company).
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Disadvantages of a corporate ownership structure:
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1. Regulations 2. Double taxation of profits-Both the corporation and the shareholders pay taxes on corporate profits.
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Production
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Is the process of combining inputs to produce output.
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Long-run
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The.....is a period of time that is long enough for the firm to adjust all of its inputs.
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Short-run
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The.....is a period of time at least once input is in fixed supply.
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Fixed inputs
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Are inputs that cannot be changed in the short-run, only in the long-run
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Variable inputs
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Are inputs that can be changed either in the long-run or in the short-run.
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We typically call the fixed input....and the variable input.....
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Capital in the long run, labor in the long-run or short-run.
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Production function
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A.....describes the amount of output that a firm can produce, as a function of the level of inputs.
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Short-run production
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A....describes the amount of output that can be produced when the variable input changes, holding the fixed input constant.
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Total product
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Is the level output that can be produced with given inputs.
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Marginal product
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Is the additional output produced by one more unit of input
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Law of diminishing marginal returns
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The....states that as we add more of any one input, while holding other inputs foxed, the many marginal product of that input will eventually decline. Does not mean that Total output falls when more workers are added. Just that it rises at a slower and lower rate.
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Fixed costs
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Are associated with fixed inputs. Are constant in the short-run.
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Variable costs
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Are associated with variable inputs. Rise in the short-run as output rises.
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AVC is lower than ATC, but they get closer together as output rises.
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ATC=AFC+AVC
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MC is hook-shaped, but will always slope upwards eventually.
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Increasing marginal cost=Diminishing marginal returns. Short-run property.
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ATC is bowl-shaped
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AFC falls as output rises because of fixed cost spread. 🙂 AVC eventually rises as output rises because of diminishing marginal returns. As Q increases. ATC=AFC(decreases)+AVC(increases eventually).
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MC intersects AVC and ATC at their minimum points.
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Margin>Average--> Average rises. Margin<Average--> Average falls.
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Long-run costs
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In the...., the firm can change all of its outputs. All costs are variable in the.....
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Less than or equal to
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The long-run cost of producing any level of output is always......the short-run cost of producing this level of output.
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Long-run average total cost (LRATC)
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The firm's.....is the minimum of all possible short-run average total costs.
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Level
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A firm changes its......of production in the short-run by changing the variable input and moving along a given short-run ATC curve. Fixed.
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Scale
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A firm changes its.....of production in the long run by changing fixed and variable inputs and moving the LRATC curve.
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Productively efficient level
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The....of output is the level of output with the lowest possible average total cost. Short run. Cost per unit.
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Productively efficient scale
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The...of output is the scale of output with the lowest possible long-run average total cost. *LRATC.
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Economies of scale
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Exist when long-run average total cost (LRATC) falls as output rises. In other words,.....means that larger firms are more efficient.
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Sources of economies scale:
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1. Specialization 2. More efficient use of lumpy inputs.
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Diseconomies of scale
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Exist when LRATC rises as output rises. In other words,.....means that larger firms are less efficient. Usually result from problems of firm management at large sizes.
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Three features of a perfectly competitive market
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1. Large numbers of buyers and sellers. (No individual can exert or influence the market price) 2. Sellers sell an identical (homogeneous) product. (No product differentiation or branding) 3. Easy entry and exit. (No huge start-up costs or legal barriers for easy entry.)
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Price-taker
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A perfectly competitive firm is a.....-Accepts the market price and sells as much as it wants to sell at the given price.
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Marginal revenue
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Is the additional revenue from selling one more unit.
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The profit-maximizing level of output occurs where....for all markets
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MR=MC.
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In other words, the firm's supply curve is its.....as long as the price is above......
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Marginal cost, average variable cost (AVC).
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Long-run equilibrium price
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The....in a perfectly competitive market is the zero-profit price.
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Long-run equilibrium
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In...., firms in perfectly competitive markets earn zero profit.
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Zero economic profit
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Means that the firm's earn enough accounting profit to cover its implicit costs, which present the next best-use of the firm's resources. Just enough, to not go to other resources, a dollar or penny left.
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Normal profit
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A....is an accounting profit that covers the firm's implicit costs. Economic?
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Excess profit
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An....is an accounting profit in.....of normal profit. Accounting profit Perfect competition eliminates excess profits!
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Adjustment to a change in demand Ex: A market is initially in long-run equilibrium, with all firms making zero profit. Suddenly, there is a large increase in demand for the product. Adjustment to change in technology Ex: A market is initially in long-run equilibrium with all firms making zero profit. Suddenly, there is a new production technology, which lowers product costs substantially. (Essentially; for the most part to a great or significant extent.)
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Short-run-Firms earn a profit. Long-run-Entry of new firms. Market supply rises. Equilibrium price falls. Firms eventually go back to earning zero profits.
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Perfect competition forces firms to adopt efficient production techniques.
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A firm refusing to adopt the new technology would earn zero profit in the short-run. A firm refusing to adopt the new technology would earn a loss in the long-run after the price adjusts to its new equilibrium level.
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Competitive markets respond automatically to changing demand conditions.
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Price is a "market signal" for new firms to enter. No government is required for markets to satisfy consumer wants. The argument works in reverse too. Firms automatically leave in response to lower consumer demand.
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Productive efficiency
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1. In long-run equilibrium, each firms produces at the efficient level. 2. In long-run equilibrium, each firms produces at the efficient scale. Perfectly competitive markets attain productive efficiency, minimizing production costs and not wasting society's scarce resources.
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Allocative efficiency
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3. In perfect competition, price is equal to marginal cost. MR(P)=MC. Perfectly competitive markets attain allocative efficiency, with price equal to marginal cost, which maximizes gains from trade. (Incentives to consumers on both sides of the market, inefficient to make little profit).
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Economic rent
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Is a payment higher than the payment that is necessary to keep some factor of production in its current use.
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Unless you do something that....., there is no way to permanently earn an economic rent.
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Other people can't do (High rent of the building-Location, Why don't you do it??-Special skills can lead to a raise or attention).
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Rent-seeking behavior
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Describes actions that siphon rents out of the economy-Increasing your share of wealth without creating any new wealth. (Adding risk, taking money from the economy. Bad! For themselves instead of other people.
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Monopoly
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A.....is a market where there is only one seller of some good of service that has no substitutes. Ex: Cheerios vs public utilities.
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Sources of monopoly
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1. Exclusive control of key inputs ExL DeDeer Diamonds. 2. Patent and copyright laws Ex: Legally granted monopoly. 3. Government franchises Ex: UPS, state liquor stores.
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Natural monopoly
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One firm can service the entire market at a lower cost than two or more firms (economies of scale) Ex: Public utilities
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Network Externalities
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An increase in the number of user raises the value of the product to existing users. More useful to you as it gathers more value and attention. Ex: Microsoft word, Internet Explorer, Windows, etc. Ex: SMS. (Texting messages??)
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A monopoly is a.....
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Price-maker
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Principals of monopoly pricing
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1. In order to sell more output, a monopolist must lower the price. but there is a trade off, choosing a higher price leads to selling less output. 2. When a monopolist reduces price to sell more units, it cuts the price for all units sold, not just for the additional units. This means that marginal revenue is less than price for a monopoly.
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Quantity effect
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When a firms increases its output (sales) by reducing price.....-revenue increases the additional units sold 🙂
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Price effect
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When a firms increases its output (sales) by reducing price....-revenue falls from reducing price for existing customers (Applies to all of the customers) (Don't sell more output, sell less at a higher price) (Note: Possible that expanding sales could reduce revenue).
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Where is the monopoly's supply curve located?
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*A monopoly does not have a supply curve.
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Unlike perfect competitors, a monopoly can earn long-run profit because there is no....
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Entry of new firms
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Inefficiency of Monopoly
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1. Monopolies are productively inefficient-They do not minimize ATC, which wastes society's scarce resources. 2. Monopolies are allocatively inefficient-They set prices above marginal cost, which generates deadweight loss. Sacrificing some trades that would have been socially efficient in order to mark up price and increase profit.
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Price discrimination
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Occurs when a firm charges different prices to different consumers for the same product.
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Requirements for price discrimination to be successful. Ex: Student ID for movie ticket.
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1. The firm can identify consumers willing to pay more 2. Market Power 3. The firm can prevent resale (arbitrage) Ex: Apple discounts, services like doctors and barbers, psychic soda machine.
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First-degree price discrimination (or perfect price discrimination)
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All buyers are charged a price exactly equal to their willingness to pay. Ex: Car dealers.
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Second-price discrimination
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Per-unit price depends on the total number of units purchased. Ex: Laundry Detergent, electricity.
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Third-price discrimination
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Different groups of customers charged different prices. Ex: Kids prices vs Adult prices. Country prices. Senior prices. Pricing strategy.
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Characteristics of monopolistic competition
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1. Many buyers and sellers 2. The products are differentiated. 3. Easy Entry and Exit. (Most consumers products and services that we purchase in a monopolistically competitive market space).
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Short-run profit maximization: Monopolistic
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Monopolistic competitor faces a downward sloping demand curve. Not perfectly elastic (like perfect competition) More elastic than monopoly. Monopolistic competitors maximize profit by choosing the output where MR=MC.
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Inefficiency of monopolistic competition
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1. Productive inefficiency-Each firm's output is less than the productively efficient level that would minimize ATC. 2. Allocative inefficiency-Price is higher than marginal cost, leading to deadweight lost. P>MC. 3. Non-price competition-Any activity other than price reductions that is designed to attract customers (e.g. advertising, branding). (Flashy, to design). Often a waste of resources
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perfect competition
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do not engage.
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monopolistic competition
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Do engage, often at high cost.
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What to do?
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Competition dooms monopolistic competitors to zero profit in the long-run. No matter how great or differentiated your product is, if there's nothing to stop other people from doing what you are doing, there is no long-run profit!*
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Strategies for the long-term
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1. Always stay on the cutting edge-On trends, up to date. 2. Try to lock your customers in-Making it difficult for them to go to another company. 3. Barriers to entry-Limit competition.
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