Ch. 6 Sellers and Incentives

A perfectly competitive firm will choose to shut down when the ________ intersects the marginal cost curve below the _______.

price (marginal revenue); average variable cost curve

average fixed cost

total fixed cost divided by the total output

average variable cost equals...

total variable cost divided by the quantity of output

Average variable cost

total variable cost divided by the total output

the equilibrium price is the

long-run average total cost of the last entrant into the market

Price elasticity of supply

How responsive producers are to changes in the market price

3 problems a seller has to solve in order to maximize profit

1. How to make the product 2. What is the cost of making the product? 3. How much can the seller get for the product in the market?

Elasticity of supply will be greater:

-the more inventory the firm has -the more easily the firm can hire workers -the longer the time horizon

Conditions of a perfectly competitive market:

1. No buyer/seller in the market is big enough to influence the market price (so many consumers and producers that no one can change the market price with his/her behavior) 2. Sellers in market produce identical goods (an individual seller can't influence the market price due to selling a unique product), same products should have same price 3. Free entry and exit in the market (sellers can respond to potential profits in a market by entering, or can leave markets that are no longer profitable—both of which have implications on market price)

Options during shut down

1. Stay open (costs you pay= fixed + variable) 2. Close (costs you pay= fixed)

Supply curve represents

A willingness to sell a good/service at various price levels

Constant returns to scale

ATC does not change as output increases (if inputs double, output doubles because of gains from specialization)

Economies of scale

ATC falls as output increases (if inputs double, output more than doubles because large set-up costs and worker specialization)

Diseconomies of scale

ATC increases as output increases (if inputs double, output increases by less than double because top heavy—too much management)

Revenue

Amount of money the firm brings in from the sale of its product (TR= Price x Quantity sold), firm has control over the quantity

Firm

Any business entity that produces and sells goods or services

Average total cost

total cost divided by the total output

Marginal product can be negative because

Capital is fixed in the short run; if more and more workers keep getting added, they will get in each other's way and cause output to fall

How to change output in long run

Change all resources

How to change output in short run

Change labor (costs are fixed)

Fixed cost

Cost of fixed factors of production, which a firm must pay even if it produces zero output; fixed costs do not change as output changes

Variable cost

Cost of variable factors of production, which change along with a firm's output

Producer surplus

Difference b/w price the firm would be willing to except and the market price; diff. b/w market price and supply curve or marginal cost curve

Sellers ____ and _____ markets based on profit opportunities

Enter; exit

Law of diminishing returns

Eventually, marginal product falls; at some point, each additional worker contributes less output than the worker before; states that successive increases in inputs eventually lead to less additional output

Variable factor of production

Inputs that can be changed in a certain period of time and that change if the level of output changes

Fixed factor of production

Inputs that cannot be changed in the short-run and that stay the same, regardless of how much output is produced

How would the introduction of legal or technical barriers to entry affect the long-run equilibrium in a perfectly competitive​ market?

It would reduce any downward pressure on prices from entry and allow economic profits in the long run.

in order for a firm to maximize profit

MR=MC (P=MR) (marginal cost has to equal price)

Specialization

Marginal product increases with the first workers; workers are more efficient when they work together to produce a good; result of workers developing a certain skill set in order to increase total productivity

Goal of the seller

Maximize profit

Long run

Period of time where all of the firm's inputs can be changed; planning period; firms can enter or exit an industry

Short run

Period of time where only some of the firm's inputs can be varied

Seller's problem (3 parts)

Production, costs, and revenues

Total revenue= Total costs= Profit=

TR= P x Q TC= ATC x Q Profit= (P x Q)-(ATC x Q)= (P-ATC) x Q

Shut down

The decision to stop producing in the short run—occurs if price falls below AVC

Economic profit

Total revenue - total costs (explicit + implicit); opportunity cost is implicit

Accounting profit

Total revenue - total costs (explicit only)

Would a​ profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short​ run?

Yes, but only if price stayed above average variable cost.

Is it possible for accounting profit to be positive and economic profit to be negative?

Yes, this could occur if explicit costs were modest and implicit costs were high.

As ATC curve is increasing, the MC is _______ the ATC curve.

above

Physical capital

any good, including machines and buildings used for production

When determining which firms enter the market at first, we look at​ ____________.

average total cost

As ATC curve is decreasing, the MC is _____ the ATC curve.

below

sunk costs

costs that, once committed, can never be recovered and should not affect current and future production decisions

if the market price of the product falls, producer surplus will ________ since this change results in a lower price, which means there is ______ area between the supply curve and the market price for the good.

decrease; less

when some sellers enter a competitive market, the equilibrium price ______ and the equilibrium quantity ______

decreases; increases (supply curve shifts to right when sellers enter)

If demand shifts to left, then the last firm that entered...

receives negative economic profits, so it exits the market

Total cost

sum of variable and fixed costs

Marginal cost curve intersects the average total cost curve at...

the average total cost curve's minimum point

Marginal product

the change in total output associated with using one more unit of input

In the LONG​ run, the supply curve for a perfectly competitive firm is represented by...

the portion of marginal cost curve above average TOTAL cost

the​ SHORT-run supply curve for a perfectly competitive firm is represented by...

the portion of the marginal cost curve above average VARIABLE cost.

the short-run supply curve for a perfectly competitive firm is represented by...

the portion of the marginal cost curve above average variable cost

Producer surplus is the difference b/w

the price consumers pay and the supply curve

Production

the process by which the transformation of inputs to outputs occurs

total variable cost equals...

total cost - total fixed cost

last firm that enters receives...

zero economic profits