Econ Exam 3 connect ?s

the amount of revenue produced per unit of an output sold is the ___ revenue

average

fixed costs

costs that do not change with the amount of output produced -materials

what 2 things should you considers about how much output it should produce to max profits

-MR -MC

economic profit formula

EC=TR-Economic costs

the efficiency loss resulting from a monopolist market is called

a deadweight loss

marginal costs:

can only equal the average cost when the marginal cost is risinig -will cause the average cost to rise only if the marginal cost is rising

the ___, the average revenue, and the marginal revenue curves for a perfectly competitive firm are the same horizontal line at the market price

demand

___ of scale is a condition in which the long-run average total cost of production increases as production increases

diseconomics

the level of profit that occurs when total revenue is ___ to total cost is known as normal profit

equal

when a firm shuts down in the short run, it must still pay the ___ costs

fixed

if the market price is below the average variable cost, the firm is

losing money in the short run and should shut down

___ reduce the ability of goods and services and consumers ability to but those goods

monopoly

a pure ___ has the overall demand to itself, because it is the only seller in the market

monopoly

in a perfectly competitive market , homogeneity means that firms must charge the market price for the goods or the services they produce because:

there are hundred of other perfectly good subs -the market is competitive

marginal > average

average increases

conditions for closing down

TR<TVC P< minimum AVC

if MC>ATC the ATC curve must be

rising

economic profit

the level of profit that occurs when TR > TC

costs that change with the amount of output are ___ costs

variable

you close down in the short run when

1. TR<TC 2. AR=P < minimum AVC

marginal = average

average stays the same

business operating decisions should be based on ___ profit

economic

variable inputs

inputs that can be changed relatively quickly -ex labor

explicit costs are also known as _____ costs

accounting

market structure

1. number of firms in the industry 2. similarity of products (goods and services) 3. knowledge of the market by key players 4. ease of entry and exit in the industry

Pure monopoly

1. Number of firms: one 2. Power to set prices: yes 3. Nature of produce: unique 4. Ease of entry and exit: hard

Average product equation

Q/L

average total cost

TC divided by the amount of output produced; total cost per unit

average fixed cost

TFC divided by the amount of output; fixed cost per unit

average fixed cost equation

TFC/Q

total revenue minus explicit costs of production is ___ profit

accounting

the vertical distance between the average variable cost and the average cost curves is equal to

average fixed costs -AFC=ATC-AVC

how do you know if you should stay in business or shut down

compare profits of staying in business or profits of shutting down.

a perfectly ___ market is characterized by a large number of ___ producing a ___ product and taking the market ___ as given, witch easy entry and exit into the market

competitive, firms, standardized, price

if MC=ATC the ATC curve must be

minimum

total cost equals -tfc+tvc -afc+tvc -mfc+tvc -tfc+avc

tfc+tvc

if selling another unit of output increases revenue, demand is

elastic

zero economic profit

no incentive for resources to leave or enter

normal profit is also known as ___ economic profit

zero

total revenue minus the explicit costs of production is _____ profit

accounting

___ profit creates an incentive for other perfectly competitive firms to enter the market

economic

the demand for a perfectly competitive product is a ___ line originating at the market price

horizontal

the level of profit that occurs when the total revenue is less than the total cost is

loss

the market condition in which firms do not face incentives to enter or exit the market and firms earn a ___ profit is known as long run equilibrium

normal

economic costs

the costs associated with the use of resources; the sum of explicit and implicit costs

account profit

total revenue minus the explict costs of production

IF MR>MC, total profits will rise by how much

the difference between MR and MC

the shape of the long run average total cost curve can differ for different types of firms

true

a compant can break even and meet operating costs without a loss when it earns a ___ economic profit

zero

fixed inputs

inputs that cannot be changed in a short period -factory

Average product of labor

the level of output divided by the level of the input -AP=Q/L

conditions necessary to carry out successful price discrimination

-firms must have price setting power -markets must be separable (cannot resell the good) -markets must be subject to different price elasticities of demand

all firms maximize profits by producing the quantity of output at which the marginal ___ is equal to the marginal ___

cost revenue

in economics, we refer to a situation in where there is only one firm but no real ___ to entry as a contestable market

barriers

the level of profit that occurs when total revenue is equal to total cost is known as ____ profit

normal

allocative efficiency

occurs when resources are allocative among the firms in a way so that society has a mix of goods it wants the most

the total amount of output produced with a given amount of resources is known as the total

product

long run

a period of time over which all inputs are free to vary

profit maximizing rule for all market structures

-choose output level where MR=MC -set the price by going to the demand curve at the Q where MR=MC -Total profit = total revenue - total cost -average profits or profit per units = P-ATC

price takers

firms that take or accept the market price and have no ability to influence the price

Total fixed costs divided by the amount of output produced is equal to average total cost marginal cost average fixed cost average variable cost

AVC

marginal product is the

additional output produced as a result of more unit of a variable resource

marginal revenue

additional revenue associated with the sale of an additional unit

zero ___ profit or normal profit is the revenue needed for a company to break even and meet operating costs without a loss

economic

long run equlibrium

market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit, Generally it occurs when the market price is equal to the minimum average total cost faced by firms

total costs

the sum of the fixed and variable costs of production

total product

the total amount of output produced with a given amount of resources

total ___ costs change with output, where as total ___ does not

variable, fixed

total ___ costs change with outputs, where as ___ costs do not

variable, fixed

Profit

Average revenue > Average total cost

total fixed costs

TFC= the sum of the fixed costs (building, labor, machines) which equal the sum of the costs that do not vary as the level of output changes`

accounting profit

TR - Explicit cost

average variable cost

TVC divided by output produced; variable cost per unit

pure monopoly

a market structure in which one firm accounts for 100% of industry sales -pure = no good substitutes. the cross-price elasticity of demand is 0 -price maker

long run

a period of time in which all inputs of production are variable

average revenue is the

amount of revenue per unit of a product sold

generalizations about the law of diminishing returns

an empricial generalization -technology assumed constant -at least one input constant -variable proportions between inputs must be possible.

law of diminishing returns

as the quantity of one variable input is used in the production process is increased, holding other inputs fixed a point will eventually be reached at which the additions to output will become smaller.

the vertical distance between the average variable cost and the average total cost curve is equal to

average fixed cost

which of the following are the reasons for breaking average total cost into two components?

average variable cost is used to determine whether a firm should continue to operate or should shut down in the short run -the constantly declining average fixed cost is apparent

if the marginal revenue associated with selling one more unit of output is positive, the demand is

elastic, becuase it would increase total revenue

Economic costs

explicit+implicit costs

diseconomies of scale is a condition in which the long run average cost of production ___ as production increases

increases

_____ marginal returns is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than of the previous variable resource

increasing

if a company decided to produce zero units of output`

it still has to pay fixed costs of production

the shape of the marginal cost curve is dependent on the

law of diminishing marginal returns

in the presence of economic losses, firms ___ a perfectly competitive market until the market reaches the point at whiich the firms are generating a ___ profit; then entry stops, and the market settles into its long run equilibrium

leave, normal__

at the shut down point, the price is ___ the average variable costs

less than

what is true about the firm in this case of the monopolist

since the monopolist is the maker, the firm and marker coincide because the monopolist produces 100% of industry output.

average product is the

the amount of output produced per unit of a resource employed

changes in the variable costs of resources will affect

the marginal costs faced by firms

being able to calculate total product, average product, and marginal product is important

to operate efficiently and max profits

Marginal product equation

ΔQ/ΔL

marginal costs equation

ΔTVC/ΔQ = ΔTC/ΔQ

suppose demand rises. how would this affect the profit maximizing level of output and price?

price increases, demand falls. MR>MC

average revenue = what

price of a good or service

monopoly power is the ability of a monopoly to influence ___ by controlling the ____ that it produces in the market

price, output

when the total revenue earned by a firm is less than the total cost of production, the firm faces a

loss

to calculate the profit, which three pieces of information need to be identified?

price quantity average total cost

loss

the level of profit that occurs when total revenue is less than total costs TR<TC

normal profit

the level of profit that occurs when totoal revenue is equal to total costs. this level indicated that a firm is doing just as well as it would have if it had chosed to use its resources to produce a diffrerent product or compete in a different industry -also known as 0 economic profit

minimum efficiency scale

the lowest level of output at which the longest run average total cost is minimized

marginal product

the marginal product of labor equals the change in total product per period of time associated with hiring one extra unit of labor MP=ΔQ/ΔL

Pure monopoly and price making

the monopolist firm can only charge one price -the only way it can sell more output is to lower the price -because it must lower the price, that means that the MR<price -although the monopolist will be able to sell more output at lower price, it will loose revenue on items it was previously selling at a higher price.

implicit costs

the opportunity costs of using owned resources; costs for which monearty payment is explicitly made.

implicit costs

the opportunity to a firm of using resources owned by the firm itself - you have to assign a value to the resources -the opportunity cost of you selling the resources outside of the firm

production function

the physical relationship between inputs and output 1. theres one variable input, labor. 2. output is a function of units of labor (this is short run production function) 3. all labors is just alike (homogeneous)

price discrimination

the practice of selling the same good or service to different consumers at different prices

explicit costs

these are actual dollar payments by the firm for resources used in the production process that are owned by others. for example, payments made for electricity, rent, fuel, and transportation services would qualify -the $ payments in markets provide a measure of the input purchased in its next best alternative

price discrimination curve

total profit charging one price = area of shaded square -total profit with price discrimination is the area above the square and below the demand curve

total costs

total variable cost + total fixed costs

there are few important exceptions in which monopolies are actually encouraged to incentivize positive outcome T or F

true

in addition to total cost, it is useful to calculate average cost because

-average cost numbers are more useable for managing -average cost can be compared directly to the price

an argument can be made that the economic profits generated by pure monopolies have two positive impacts on dynamic growth

-potential economic profits gives firms and entrepreneurs incentives to develop new productive processes and products -when a monopoly earns an economic profit, it has the financial capital to develop more innovations

oligopoly

1. Number of firms: a few 2. Power to set prices: yes 3. Nature of produce: differentiated or standardized 4. Ease of entry and exit: hard

monopolistic competition

1. Number of firms: many 2. Power to set prices: yes 3. Nature of produce: differentiated 4. Ease of entry and exit: easy

pure competition

1. Number of firms: many, all small 2. Power to set prices: none 3. Nature of produce: homogeneous 4. Ease of entry and exit: easy

perfect competition

1. a large number of buyers implications: no one consumer nor one producer that can influence the price. No single firm can change price 2. homogeneous (standardized) products Implications: consumers don't care where they buy the good. As long as it is the cheapest 3. Perfect knowledge ont he part of buyers and sellers implications: consumers know the price, buys from seller who chargest the lowest price 4. easy entry and exit from the market

what have we learned about pure competition and pure monopoly?

1. market power is iindicated when the firm has the power to set prices 2. market power exists when the firm faces a downward sloping demand curve 3. competitive firm is a price taker and cannot affect the price 4. the pure monopoly is a price maker. It can affect the price 5. the monopolist firm produces an output on the elastic proportion of the demand curve

a person who has been managing a dry cleaning store for $30,000 per year decides to open her own dry cleaning store. the expenses are 35,000 for salaies, 10,000 for supplies, 8,000 for rent, 2000 for unitiliies and 5000 for interest on a bank loan. the revenues of the store during the first year of operations are 100000. the total account profit is

40,000

accounting profit formula

AP=TR-EC

Variable cost per unit is equal to: -afc -atc -avc -mc

AVC =tvc/q

average total costs equation

AVC+AFC = TC/Q

firm has market power when Mr ? AR

MR<AR

any firm, if it produces and output greater than 0 should contrast output when

MR<MC -either take the loss or shut down.

we know that a pure monopoly is a price maker

MR<P so that the profit maximizing rule stays the same -monopolist chooses the output level where MR=MC -then he finds the price by reading the demand curve at the output level where MR=MC

we know now that a perfectly competitive firm is a price taker

MR=price=AT=demand -the profit maximizing rule for perfect competition can therefore be written as P=MC

Any firm, if it produces an output greater than Zero should, expand output when

MR>MC -stay in business

total revenue equals

PxQ

economic profit

TR-Economic costs, which include both explicit and implicit costs

total variabel costs

TVC = at a given output the total costs of all variable inputs (unskilled labor, materials, electricity). TVC changes as output changes *assume* one variable input - labor -wage rate per unit of time = 1$ -TVC = Price per unit of the input

total cost equation

TVC+TFC

average variable costs equation

TVC/Q

the marginal cost curve is___-shaped

U

price taker

a buyer or seller who cannot affect the market price

increasing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than the rest of the previous resource

diminishing marginal returns

a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than the previous variable resource

economies of scale

a condition in which the long-run average total costs of production decreases as productions increases

diseconomies

a condition in which the long-run average total costs of production increases as production increases

constant returns to scale

a condition in which the long-run average total costs of production remains constant as production increases

short run average total cost curve (ATC)

a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity

long run average total cost curve (LRATC)

a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable

natural monopoly

a monopoly from competition by technological barrier to enter or by ownership of unique natural resources -it arises because a single firm can supply a good or service to an entire market at a similar cost than two or more firms. -its easier for 1 firm to produce the whole market then for 2 firms to spit it up.

franchised monopoly

a monopoly protected from competition by a government grand of a monopoly privilege such as an exclusive license, permit, or patent. these can be in the form of patents, lincenses, or copyrights.

short run

a period of time in which at least input of production is fixed

the short run is

a period of time in which at least one input of production is fixed

short run

a period over time which at least one input is fixed

zero ___ profit means that the value of economic profit is negative

accounting

zero ____ profit means that the value of economic profit is negative

accounting

if MC=AVC the AVC curve must be

at its minimum

suppose demand falls. How would this affect the profit maximizing level of output and price? ex. income

at original q when demand falls to Mc>MR -price goes down and so does quantity

suppose the price of an input in the production falls. how would this affect the profit maximizing level of output and price?

at the original Q1 when the input price falls MR>MC. When price of an input falls, the supply increases -lowered the price of an input so MC shifts to the right. The company expands. Mr>MC MC=Supply curve

suppose the price of input in the production process rises. How would this affect the profit maximizing level of output and price?

at the original Q1 when the input price rises, MC>MR - she curve shifts to the left so the company contracts.

a curve showing the ___ total cost for different levels of output when at least one input of production is fixed, typically plant capacity, is the short run average cost curve

average

when marginal cost falls below the average cost, the ___ cost should be decreasing

average

marginal < average

average decreases

total cost divided by the amount of output produced is equal to

average total cost -ATC=TC/Q

negative economic profit

incentive for more resources to leave

positive economic profits

incentives for more resources to enter

one potential reason diseconomies of scale could exist is that a firm

cannot perfectly replicate its production when it expands

a condition in which the long-run average total cost of production remains constant as production increases is called

constant returns to scale

a condition in which the long-run average total cost of prodution remainis constant as production increases is called

constant returns to scale

in a perfectly competitive market, we assume the product is identical in the minds of

consumers

for profit-maximizing level of output, the price charged by a monopoly is not just different but greater than marginal ___

cost

suppose owners of the firm use their own money to start up and run a business. The owners used 100,000 of their own money that was earning an annual market return rate of 10% -what is the implicit opportunity cost to the owners of using their savings to start up the business?

cost is a flow concept and costs 10% so its 10,000 per year

variable costs

costs that change with the amount of output produced, increasing as production increases and decreaing as production decreases -ex: labor

economics of scale

is a condition in which the long-run average total cost of production decreases as production increases

____ marginal returns are a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource

decreasing

___ profit creates and incentive for other perfectly competitive firms to enter the market

economic

positive ___ profits encourage more firms to enter the market to produce goods

economic

in the presence of ___ profits, firms enter unitl the market reaches the point at which the firms are generative a ___ profit; then entry stops and the market settles into its ___ run equilibrium

economic, normal, long

the more substitutes there are for a product, the more ___ the demand for that product will be

elastic

the two conditions that guarantee consumers will enjoy the lowest prices possible are:

every firm producing the exact same product -individual firms are price takers

the decision to shut down temporarily is a short run decision to ___ an industry can be made only in the long run

exit

because the cost of a container is proportional to its surface area, by doubling the diameter of a container, a producer can

experience economics of scale

total revenue minus the total ___ explicit costs of production is accounting profits

explicit

total revenue minus the total ____ costs of production is accounting profit

explicit

when Q rises and Mr<MC then profits will

fall contract decrease output

if MC<ATC the ATC curve must be

falling

if MC<AVC the AVC curve must be

falling

increasing margnal returns is a characteristic of production whereby the marginal product of the next unit of a variable resource utalized is ___ than that of the previous variabel resource

greater

marginal values drive average values because

if the marginal value is above or below the average value, it will pull the average value up or push it down

costs for which no monetary payment is explicitly made are ___ costs

implicit

Total revenue minus the total ____ and total ____ costs of production is economic profit

implicit , explicit

an opportunity cost is associated with any cost, whether it is an ____ cost or and _____ cost

implicit, explicit

economic costs can be defined as the sum of ___ and ___ costs

implicit, explicit

total revenue minus the total ___ and total ___ costs of production is economic profit

implicit, explicit

economics of scale can result from a variety of factors, including

lower costs of inputs as firms purchase larger quantities -productivity gains from a more specialized labor

a business will charge a ___ price to the group with the relatively more elastic demand and a ___ price to the group with the relatively more inelastic demand

lower, higher

the curve showing the ___ average total cost possible for any given level of output when all inputs of production are variable in the long run average cost curve

lowest

extra or additional revenue associated with the production of an additional unit of output is the ___ revenue

marginal

for a perfectly competitive firm, the market price is equal to

marginal revenue -average revenue -demand

short run curve

marginal revenue intersects ATC and AVC at their lowest point.

in the short run, the supply curve for a fiirm is the ___ cost curve above or equal to the average ___ cost curve

marginal variable

profit ___ implies that perfectly competitive firms should expand production up to the point where marginal revenue equals marginal cost

maximization

explicit

monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by other. Also known as accounting costs

when Q rises and Mr=MC then profits will

not change

productive efficiency

occurs when output is produced at least cost

a curve showing the average total cost for different levels of output when at least ___ input of production is fixed, typically plant capacity, is the short-run average cost curve

one

one reason for diseconomies of scale is increasing ___ costs

opportuinty

costs that do not change with the amount of ___ produced are fixed costs

output

the ___ competition model is the most efficient type of market and is characterized by both productive and allocative efficiency

perfect

a market structure characterized by interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, produce is known as

perfect competition

firms that take or accept the market price and have no ability to influence that price are known as ___ takers

price

the demand for a perfectly competitive firm's product is a horizontal line originating at the market

price

price discrimination

pricing strategies for firms with monopoly power -the practice of charging more than one price for different units of a single product, when the price difference are not justified by differences in the cost of serving different costumers -charge when demand is inelastic. some people will pay any price for a product. -business people need the ticket a little time in advance and will pay a lot while vacationers will pay cheap far in advance. -leads to a higher profit

if an economy is going to produce the goods and services most wanted by society, competitive firms:

produce more of the products we value most and fewer of the products we value least

which of the following is not characteristic of perfect competitions? -large number of buyers and sellers -standardized products -east entry and exit -producers who are price makers

producers who are price makers

the 4 characteristics of a perfectly competitive market are:

producers who are price takers -a large number of buys and sellers -easy entry and exit -a standardized product

productive efficiency

producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service

allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefits equals their marginal cost

___ efficiency is usiing the fewest resources possible to produce a good or service

productive

in the long run, perfectly competitive firms achieve ___ efficiency by producing at the lowest cost and ___ efficiency by producing what consumers want

productive, allocative

to calculate profit we need to identify 3 pieces of information

quantity of output, average total cost, price

average revenue

revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold

profit equals (average ___ minus average total ___) multiplied by output

revenue, cost

when Q rises and Mr>MC then profits will

rise expand increase output

if MC>AVC the AVC curve must be

rising

in a perfectly competitive market, the price of the firm should charge is the market price because the firm is a price

taker

marginal product

the additional output produced as a result of utilizing 1 or more unit of a variable resource

margnial revenue

the amount by which total revenue increases as a result of one unit increases in the quantity of output

average product is the: -total output produced as a result of utilizing one or more unit of fixed resource -additional output produced as a result of utilizing one or more unit of a fixed resource -amount of output produced per unit of a resource employed -amount of a resource employed per unit of output `

the amount of output produced per unit of a resource employed

pure economic profit

the amount remaining after both explicit and implicit costs are subtracted from total revenue -TR-Implicit-Explicit costs=EP -TR-Cost = EP -zero is not a bad thing

accounting profit

the amount remaining after explicit costs are subtracted from total revenue TR-Explicit cost = AP -0 is bad

average product

the average amount of output produced per unit of a resource employed; total produce divided by the number of units of a resource employed

marginal revenue (MR)

the change in a firms total revenue that results from a 1 unit change in output produced and sold

marginal product

the change in output associated with one unit change in the input -MP=ΔQ/ΔL -Q = quantity L= labor -note: the marginal product is measured by the slope of a tangent line to the production function at a particular level of input usage

marginal costs

the change in total costs associated with an increase in output of one unit -ΔTVC/ΔQ = ΔTC/ΔQ

what are 2 reasons for breaking average total cost into two components

the constantly decling average variable fixed cost is apparent -average variable cost is used to determine whether a firm should continue to operate or should shut down in the short run

consumer surplus

the difference between the max that a consumer would be willing to pay for a unit of a good and the amount that he or she actually pays

producer surplus

the difference between what producers receive for a unit of a good and the min they would be willing to accept

marginal cost

the extra or additional cost associated with the production of an additional unit of output

the marginal cost is the

the extra or additional cost associated with the production of an additional unit of output

marginal cost is the

the extra or addititonal cost associated with the production of an additional unit of output

marginal revenue curve for a perfect competition

the firm is a price taker

what is the relevant portion of the monopolist demand curve?

the first half is elastic while the second half is inelastic. you only want to produce the elastic side no there are not other subsititues. -Only operate on elastic side. -when price goes down total revenue goes up. when price goes up, total revenue goes down.

productive efficiency is

using the fewest resources possible to produce a good or service

costs that change with the amount of output produced are ___ costs

variable

is zero profit bad?

zero accounting profit means that you are bringing in just enough revenue to cover all the monetary payments you have to make. Once implicit costs are taken into account, then zero accounting profit means that the value of your economic profit is negative, which isnt good. -zero economic profit isnt bad. it means your revenures are covering not only all the monetary payments you have to make but also all of your implicit costs. it basically means your doing just as well as you would have at your next best optin