Econ Exam 2

Production Function

'Technological relationship'expresses the maximum quantity of a good attainable from different combinations of factor inputs (often expressed graphically-how much output we can produce with varying amounts of faactor inputs)

Elasticity and Revenue

-A price cut decreases total revenue if demand is price inelastic. -A price cut increases total revenue if demand is price elastic. -A price cut does not change total revenue if demand is unitary elastic.

Costs of Production

-A production function tells us how much a firm could produce but not how much it will want to produce -The most desired rate of output is the one that maximizes total profit(Profit= difference between total revenue and total cost)

Supply Horizons

-A short-run horizon which concerns the production decision. -A long-run horizon which concerns the investment decision.

Fixed Costs

-Do not change with the rate of output -Cannot be avoided in the short run

Utility Theory

-Economists assume that the more pleasure a product gives, the higher price buyers are willing to pay. -An absolute measure of utility is not possible because the perception of satisfaction differs among individuals. -Diminishing marginal utility is a common experience. -It is a sufficient basis for economic predictions of consumer behavior.

Possible Ways of Increasing Productivity

-Increasing education -Vocational training -Increased capital investment

Supply Shifts

-Marginal costs determine the supply decisions of a firm -Anything that alters marginal cost will change supply behavior

SLIDE 30--Supply Shifts

-Marginalcosts determine the supply decisions of a firm -Anything that alters marginal cost will change supply behavior

Slide 19--Profit Maximizing Rate of Output

-Never produce anythign that costs more than it brings in -A competitive firm wants to expand the rate of production whenever price exceeds marginal cost (MARGINAL REVENUE=MARGINAL COST)

Important influesnces on marginal cost

-Price of factor inputs -technology -expectations

Determinants in Demand

-Taste(desire for this and other goods) -Income(of the consumer) -Expectations(for income, price, and taste) -Other goods(their availability and price) -Number of Consumers in the market

Variable Costs

-That change when the rate of output is altered -Any short-run change in total costs is a result of changes in variable costs Ex. Labor & Materials

Law of Demand

-The concepts of marginal utility and ceteris paribus explain the downward slope of the demand curve. -With given income, tastes, expectations, and prices of other goods and services, people are willing to buy additional quantities of a good only if its price falls. -The concepts of marginal utility and ceteris paribus explain the downward slope of the demand curve. - the quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.

Long Run Investment

-The decision to build, buy, or lease plant and equipment; the decision to enter or exit an industry. -In the long run, businesses have no lease or purchase commitments. -There are no fixed costs in the long run.

Law of Diminishing Returns

-The marginal physical product of a variable input eventually declines or diminishes as more of it is employed with a given quantity of other (fixed) inputs -The additionaly units of resources (inputs) are less valuable to the firm

Law of Diminishing Marginal Utility

-The marginal utility of a good declines as more of it is consumed in a given time period. -Suppose a student who enjoys popcorn can eat all he/she wants for free. -As long as the marginal utility is positive, the consumer receives additional satisfaction and total utility increases. -Additional quantities of a good yield increasingly smaller increments of satisfaction.

Short Run Production

-The nature of the supply decision varies with the relevant time frame. -The short-run production decision is the selection of the short-run rate of output (with existing plant and equipment). -The short run is characterized by the existence of fixed costs that become variable in the long run.

Market Demand

-The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period. -Market demand is the sum of all individual demands.

Determinants of Price Elasticity

-Whether the Good is a Necessity or Luxury -The Availability of Substitutes -The Price Relative to Income

Tendency toward zerio economic profits

-entry is force driving down market prices -price falls until there are no economic proft Entry is the force driving down market prices. Price falls until there are no economic profits. At that point, average total cost is at a minimum.

Exit

-firms exit the industry when profit opportunities look better elsewhere -firms leae the industry if price falls below avg cost -price rises until there are no economic losses

Competitive Market Supply

-price of factor inputs -technology -expectations -number of firms in the industry***

Total Profit

-the profit maximizing producer doesnt seek to maximize per unit profits - the profit maximizing producer has no particular desire to produce at that rate of output where ATC is at minimum -Total profits are maximized only where p=MC

Consumption Represents what?

2 out of every 3 dollars of GDP

What percentage of a households budget is spent on housing, transportation, food, and health?

70%

Total Profit

=total revenue-total cost or =avg profit(profit per unit) x quantity sold

Competitive Market

A competitive market is one in which no buyer or seller has market power. No single producer or consumer has any control over the price or quantity of the product.

A flat or horizontal demand curve for a firm indicates that:

A firm has now market power

In a competitive market where firms are earning economic profits, which of the following is likely as the industry moves toward long-run equilibrium?

A lower price and more firms.

Monopoly

A monopoly firm is one that produces the entire market supply of a particular good or service. It is a price setter, not a price taker. It has no direct competitors. It has complete market power; it can alter the market price of a good or service.

price takers

A perfectly competitive firm is a price taker. An individual firm's output decisions do not affect the market price. An individual firm must take the market price and do the best it can within these constraints.

Competitive Firm

A perfectly competitive firm is one without market power. It is not able to alter the market price of the good it produces. It is a price taker. It competes with many other firms selling homogenous products.

Accounting Cost

Accounting costs are the direct dollar costs of producing goods or services. This includes any actual out-of-pocket expenses. (explicit cost)

zero economic profit

All economic profits are eliminated at the limit of the competitive process.

Policy Perspective

Competitive markets present a strong argument for laissez faire. Government should promote competition because markets do a good job of allocating resources. This means keeping markets open and accessible to new entrants by dismantling entry barriers.

Max. Efficiency

Competitive pressure on prices forces suppliers to produce at the least possible cost. Society gets the most it can from its available scarce resources.

Elastic Demand

Demand is elastic if the absolute value of E is greater than 1 Consumer response is large relative to the change in price.

Inelastic Demand

Demand is inelastic if the absolute value of E is less than 1. Consumers are not very responsive to price changes.

Unitary Elastic Demand

Demand is unitary elastic if the absolute value of E equals 1. The percentage change in quantity demanded is equal to the percentage change in price.

Social Value of Losses

Economic losses are a signal to producers that they are not using society's scarce resources in the best way.

what is not considered a barrier to entry?

Equilibrium pricing

Supply Behavior

How firms make production decisions helps expxlain how the market establishes prices and quantities

Long Run Equillibrium

In long-run competitive market equilibrium: Price equals minimum average total cost. Economic profit is eliminated. As long as it is easy for existing producers to expand production or for new firms to enter an industry, economic profits will not last long.

False

In monopolistic competition, firms charge the same price as other firms in the market since they produce identical products. (T or F)

production decision

It is the selection of the short-term rate of output (with existing plant and equipment).

Characteristics of a competitive market

Many firms Identical products Low entry barriers MC = p Zero economic profit Perfect information

The law of diminishing returns helps to explain why:

Marginal cost increases, in the short run, as more output is produced.

Negative Marginal Physical Product

Marginal physical product may become negative if too much labor is added to a fixed level of capital and land.

Resource Constraints

Marginal physical product may initially increase due to specialization of labor

Revenue vs. Profits

Maximizing output or revenue is not the way to maximize profits. Total profits depend on how both revenue and cost increase as output expands. A business is profitable only within a certain range of output.

Market Structure Types

Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly

Perfect Competition

Perfectly competitive firms are pretty much faceless. They have no brand image, no real market recognition. A perfectly competitive firm is one whose output is so small in relation to market volume that its output decisions have no perceptible impact on price.

Short Run Decision Rules for a Competitive Firm

Price > MC ---> Increase output rate Price = MC----> Maintain output rate(profts max) Price < MC---->

A profit-maximizing producer wants to produce where:

Price equals marginal cost

Economic Profits Dissappear

Price falls to the level of minimum average total cost.

Economic Explanation

Prices and income are just as relevant to consumption decisions as more basic desires and preferences.

Inefficient

Producing any less of production

Factors of Production

Resource inputs used to produce goods and services (land, labor, capital, and entrepreneurship)

Demand

The ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus.

Marginal Physical Product(MPP)

The chance in total output associated with one addictional unitof input. (=change in total output divided by change in input quantity)

Marginal Cost

The change in total cost when one more unit of output is produced:

Complementary Goods

The demand for a good decreases when the price of a complement to the good goes up.

Substitute Goods

The demand for a good increases when the price of a substitute for the good goes up.

Sociopsychiatric Explanation

The desire for goods and services arises from our needs for social acceptance (or envy), security, and ego gratification. Ex-Latest and greatest phone

If the level of productivity increases, then:

The marginal cost curve shifts downward.

Market Structure

The number and relative size of firms in an industry.

No market power

The output of a lone perfectly competitive firm is so small relative to market supply that it has no significant effect on the total quantity or price in the market

The Relentless Profit Squeeze

The unrelenting squeeze on prices and profits is a fundamental characteristic of the competitive process. The market mechanism works best in competitive markets.

Profit Max. and Price

To maximize profit, the firm should produce an additional unit of output only if it brings in revenue that is greater than the cost of producing it. Since competitive firms are price takers, they must take whatever price the market has determined for their products.

Industry Entry and Exit

To understand how competitive markets work, we focus on changes in equilibrium rather than on a static equilibrium -the number of firms in a competitive industry is not fixed -Industry entry and exit is a driving force affecting market equilibrium

Average Total Cost

Total cost divided by the quantity produced in a given time period: -U SHAPED

Profit=

Total revenue - Total cost

Short Run vs. Long Run

Traditional accounting periods(short-run up to a year and long-run beyond that time) arent always useful in economics

Market Demand vs. Firm Demand

We must distinguish between the market demand curve and the demand curve confronting a particular firm. The market demand curve for a product is always downward-sloping. The demand curve facing a perfectly competitive firm is horizontal.

Oligopoly

a few large firms supply all or most of a particular product.

Supply

ability and willingness to sell specific quantities of a good at alternative prices in a given time period -Competitive firms adjust the quantity supplied until MC=price

Efficiency

achieving the maximum output attainable from given inputs

Entry

additional firms will enter the indsutry when profits are plentiful -economic proftis attract firms --more firms enter the indsutry -the market supply curve shifts to the right -the price decreasees Industry output increases and price falls --New firms continue to enter competitive industry so long as profits exist

Barriers to Entry

are obstacles that make it difficult or impossible for would-be producers to enter a market, like patents.

ATC and MC curve shifts?

down when productivity increases

profit

is the difference between total revenue and total cost.

Price Elasticity of demand

is the percentage change in quantity demanded divided by the percentage change in price.

Monopolistic competition

many firms supply essentially the same product but each enjoys significant brand loyalty.

Duopoly

only two firms supply a product.

Profit per Unit=

p - ATC (price minus average total cost)

total revenue=

price x quantity

Supply

the ability and willingness to sell specific quantities of a good at alternative prices in a given time

Total Utility

the amount of satisfaction obtained from entire consumption of a product.

Marginal Utility

the change in total utility obtained by consuming one additional marginal unit of a good or service. ( =change in total utility divided by change in quantity)

Economic Cost

the dollar value of all resources used to produce a good or service; the opportunity cost of resource use. (explicit costs + implicit costs)

Utility

the pleasure or satisfaction obtained from a good or service.

Total Revenue

the price of a product multiplied by the quantity sold in a given time period.

Market Mechanism

the use of market prices and sales to signal desired outputs

Market Supply

total quantity ofa good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus