Fixed costs
Variable costs
Total costs
Marginal cost
additional cost of one additional output,
change in total cost/ change in output
Average variable cost (AVC)
Average fixed cost (AFC)
Average total cost (ATC)
Short run
Long run
MP and MC are mirror images of each other
MC intersects the ATC curve at its lowest point
Change in fixed cost, only AFC and ATC move
Change in variable cost, MC, AVC, and ATC change
Economies of scale
Increasing returns to scale - output more than doubles
Constant returns to scale - output double
Decreasing returns to scale - output less than doubles
Accounting profit
Economic profit
Profit maximizing rule
Shut down rule
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
Barriers to entry
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
Normal profit
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Perfect competition characteristics
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
One large firm
Unique products
High barriers
Monopolies are price makers
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)
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)
MR = MC characteristics
Applies to all market structures
Rule applies only if price is above AVC
Can be restated as P = MC
Change in fixed costs shifts ATC and AFC
Change in variable costs shifts ATC, AVC, and MC
Firms enter if there is profit
Firms leave if there is loss
All firms break even, no economic profit
Productive efficiency
Allocative efficiency