Unit 2 microeconomics - Assignment Essays

question

Fixed costs

answer

don't change with the amount produced (rent, insurance, managers salaries)

question

Variable costs

answer

do change with amount produced (raw materials, labor, electricity)

question

Total costs

answer

fixed + variable costs

question

Marginal cost

answer

additional cost of one additional output,

change in total cost/ change in output

question

Average variable cost (AVC)

answer

variable cost / quantity

question

Average fixed cost (AFC)

answer

fixed cost / quantity

question

Average total cost (ATC)

answer

total cost / quantity

question

Short run

answer

period in which at least one resource is fixed

question

Long run

answer

ALL resources are variable, NO fixed resources

question

Curve relationships:

answer

MP and MC are mirror images of each other

MC intersects the ATC curve at its lowest point

question

Shifting cost curves:

answer

Change in fixed cost, only AFC and ATC move

Change in variable cost, MC, AVC, and ATC change

question

Economies of scale

answer

long run average cost falls because mass production techniques are used

question

Returns to scale:

answer

Increasing returns to scale - output more than doubles

Constant returns to scale - output double

Decreasing returns to scale - output less than doubles

question

Accounting profit

answer

revenue - explicit cost

question

Economic profit

answer

revenue - explicit & implicit cost

question

Profit maximizing rule

answer

MR = MC

question

Shut down rule

answer

a firm should continue to produce as long as the price is above the AVC

question

Marginal cost and supply:

answer

A firm will produce nothing if the price is below minimum AVC

If price increases the amount the firm produces will increase

MC curve shifts left when AVC increases

MC curve shift right when AVC decreases

question

Barriers to entry

answer

factors that [prevent new firms from entering a given market

Low barriers have more competition and individual firms make less profit

High barriers has less competition and individual firms make more profit

question

Normal profit

answer

in an efficient competitive market firms that have identical products will make a normal profit, they will break even and have no economic profit

question

Four market structures

answer

Perfect competition

Monopolistic competition

Oligopoly

Monopoly

question

Perfect competition characteristics

answer

Many small firms

identical products

Low barriers - easy for firms to enter and exit

Seller has no need to advertise

Firms are “price takers”

Each firm has no control over price

Demand =marginal revenue and average revenue and price (MR = D = AR = P)

perfectly elastic

question

Monopoly Characteristics

answer

One large firm

Unique products

High barriers

Monopolies are price makers

question

oligopolies characteristics

answer

Few large producers (less than 10)

Identical or different products

High barriers to entry

Control over price (price makers)

Mutual interdependence (firms must worry the decisions of their competitors and use strategy)

question

Monopolistic Competition Characteristics

answer

Relatively large number of sellers

Differentiated products

Some control over price

Low barriers - easy for firms to enter

A lot of non price competition (advertising)

question

MR = MC characteristics

answer

Applies to all market structures

Rule applies only if price is above AVC

Can be restated as P = MC

question

Cost curve shifters

answer

Change in fixed costs shifts ATC and AFC

Change in variable costs shifts ATC, AVC, and MC

question

Perfect competition in the long run:

answer

Firms enter if there is profit

Firms leave if there is loss

All firms break even, no economic profit

question

Constant cost industry

answer

new firms entering does not increase the price for firms already in the market

question

Increasing cost industry

answer

new firms entering the market increase the price for firms already in the market

question

Two kinds of efficiency:

answer

Productive efficiency

Allocative efficiency

question

Product efficiency

answer

producing at the lowest possible cost, price equals ATC

question

Allocative efficiency

answer

producing at amount most desired by society, price equals marginal cost

1 of 33

question

Fixed costs

answer

don't change with the amount produced (rent, insurance, managers salaries)

question

Variable costs

answer

do change with amount produced (raw materials, labor, electricity)

question

Total costs

answer

fixed + variable costs

question

Marginal cost

answer

additional cost of one additional output,

change in total cost/ change in output

question

Average variable cost (AVC)

answer

variable cost / quantity

question

Average fixed cost (AFC)

answer

fixed cost / quantity

question

Average total cost (ATC)

answer

total cost / quantity

question

Short run

answer

period in which at least one resource is fixed

question

Long run

answer

ALL resources are variable, NO fixed resources

question

Curve relationships:

answer

MP and MC are mirror images of each other

MC intersects the ATC curve at its lowest point

question

Shifting cost curves:

answer

Change in fixed cost, only AFC and ATC move

Change in variable cost, MC, AVC, and ATC change

question

Economies of scale

answer

long run average cost falls because mass production techniques are used

question

Returns to scale:

answer

Increasing returns to scale - output more than doubles

Constant returns to scale - output double

Decreasing returns to scale - output less than doubles

question

Accounting profit

answer

revenue - explicit cost

question

Economic profit

answer

revenue - explicit & implicit cost

question

Profit maximizing rule

answer

MR = MC

question

Shut down rule

answer

a firm should continue to produce as long as the price is above the AVC

question

Marginal cost and supply:

answer

A firm will produce nothing if the price is below minimum AVC

If price increases the amount the firm produces will increase

MC curve shifts left when AVC increases

MC curve shift right when AVC decreases

question

Barriers to entry

answer

factors that [prevent new firms from entering a given market

Low barriers have more competition and individual firms make less profit

High barriers has less competition and individual firms make more profit

question

Normal profit

answer

in an efficient competitive market firms that have identical products will make a normal profit, they will break even and have no economic profit

question

Four market structures

answer

Perfect competition

Monopolistic competition

Oligopoly

Monopoly

question

Perfect competition characteristics

answer

Many small firms

identical products

Low barriers - easy for firms to enter and exit

Seller has no need to advertise

Firms are “price takers”

Each firm has no control over price

Demand =marginal revenue and average revenue and price (MR = D = AR = P)

perfectly elastic

question

Monopoly Characteristics

answer

One large firm

Unique products

High barriers

Monopolies are price makers

question

oligopolies characteristics

answer

Few large producers (less than 10)

Identical or different products

High barriers to entry

Control over price (price makers)

Mutual interdependence (firms must worry the decisions of their competitors and use strategy)

question

Monopolistic Competition Characteristics

answer

Relatively large number of sellers

Differentiated products

Some control over price

Low barriers - easy for firms to enter

A lot of non price competition (advertising)

question

MR = MC characteristics

answer

Applies to all market structures

Rule applies only if price is above AVC

Can be restated as P = MC

question

Cost curve shifters

answer

Change in fixed costs shifts ATC and AFC

Change in variable costs shifts ATC, AVC, and MC

question

Perfect competition in the long run:

answer

Firms enter if there is profit

Firms leave if there is loss

All firms break even, no economic profit

question

Constant cost industry

answer

new firms entering does not increase the price for firms already in the market

question

Increasing cost industry

answer

new firms entering the market increase the price for firms already in the market

question

Two kinds of efficiency:

answer

Productive efficiency

Allocative efficiency

question

Product efficiency

answer

producing at the lowest possible cost, price equals ATC

question

Allocative efficiency

answer

producing at amount most desired by society, price equals marginal cost

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