Econ 2nd Midterm Review

What does the marginal cost curve measure?

The change in cost associated with a change in output. It is the extra cost of producing an additional unit of output

Some of the problems of using cost analysis in the real world

1. Economies of Scope (when firms produce multiple products together instead of more of the same product) 2. Learning by doing and technological change (the firm gets better at producing outputs as they continue to produce and technological changes improve production) 3. Unmeasured costs such as opportunity costs 4. Many Dimensions??

Characteristics for a monopolistic competition

1. Many sellers 2. Differentiated products 3. Multiple dimensions of competition 4. Easy entry of new firms in the long run

6 characteristics of perfect competition

1. all firms are informed 2. no barriers to entry 3. buyers and sellers are price takers 4. the firms products are all identical 5. Demand curve for a perfect competition is perfectly elastic 6. large number of firms (25+)

Monopolies barriers to entry

1. legal barriers/government restrictions (patents) 2. sociological barriers (entry is prevented by custom or tradition) 3. Natural barriers (firm has unique ability to produce what other firms can't duplicate) 4. Technological barriers, large economies of scale (size of the market can support only 1 firm)

What is the relationship between AVC and ATC curves?

ATC and AVC curves are both U-shaped. Because of fixed costs, the AVC curve is always below the ATC curve, but the two curves converge as output increase (because AFC equals ATC-AVC, and AFC decreases as output increases).

If marginal cost is below the ATC curve then...

ATC must be falling and if marginal cost if above ATC curve then average cost must be rising.

Technological Change

An increase in the range of production techniques that leads to more efficient ways of producing goods as well as the production of new and better goods

What is marginal cost equal to?

MC = Changein TC/Changein Q (Changein TVC/Q)

envelope relationship

The relationship showing that, at the planned output level, short-run average total cost equals long-run average total cost, but at all other levels of output, short-run average total cost is higher than long-run average total cost

What does average variable cost measure?

The variable costs averaged over total output

Welfare loss in monopolies

Triangular areas of B and D = the dead wight loss; the costs that society incurs from the monopolies exsistence

Economic efficiency

Using a combination of inputs with the lowest possible price for a given output

Technical efficiency

Using as few inputs as possible to produce a given output

Economies of scale

When LRATC is falling, when the firm can increase its ATC by expanding and increasing output

What is the relationship between Marginal cost and average cost (AVC and ATC)?

When MC curve is below the AVC or ATC curves, the AVC (or ATC) curve is falling. The MC curve intersects at the minimum point. When the MC curve is above AVC (or ATC) the AVC (ATC) is rising.

What is the relationship between marginal product (MP) and average product (AP)?

When marginal product is below average product, AP is falling, when MP is above AP, AP is rising.

Diseconomies of scale

When the LRATC curve is rising, it increases as output increases because it now costs more to produce more outputs can be due to lowering team spirit, monitoring costs

Constant economies of scale

When the LRATC curve is straight, the firm is in equilibrium and producing at the profit-maximizing condition

Long run decision

a decision in which the firm can choose among all possible production techniques

Conspicuous consumpsion

consumption of goods not for one's direct pleasure, but simply to show off

Status quo basis

individuals' actions are influence by the current situation even when that situation is not important to the decision.

Economies of scope

instead of looking to expand its market for that one product the firm expands its market by producing other products that usually compliment the first product ex. Gasoline stations also selling soda and minimart food, cereal firm to also market dog food, etc. **in the real world, firms look at both economies of scale and economies of scope**