Exam 3 Econ 210

Characteristics of Monopolistic Markets

-A single seller -No acceptable substitutes for the product -Barriers to enter into the market

Average Fixed Cost

Fixed cost per unit of output. AFC=TFC/Q changes with the quantity of output produced.

Total Fixed Cost

The sum of all fixed costs

Total Cost

The sum of all the costs incurred in producing a specific total quantity of output(Q). TC=TFC+TVC

Total Variable Cost

The sum of all variable costs

Economic Costs

The sum of explicit and implicit costs. Include all the cots and are equal to total costs. TC = Total Economic Cost = TFC + TVC = Total Explicit Cost + Total Implicit Cost

Constant Economies of Scale

With constant returns to scale, long-run average cost does not change as the plant size increases

DIseconomies of Scale

With decreasing returns to scale, long-run average cost increases as the plant size increases

Economies of Scale

With increasing returns to scale, long-run average cost decreases as the plant size increases

Normal Profit

Zero Economic Profit. When there is normal profit, TR = Total Explicit Cost + Total Implicit Cost, or TR= TC, or Total Accounting Profit = Total Implicit Cost. Thus, the business is earning just enough revenue to cover all the implicit costs after paying for all the explicit costs

Fixed Cost

the cost of a fixed input. does no change with the quantity of output produced.

Production and costs in the long run

-Because all inputs are variable in the long run, production is more flexible. Flexibility in production makes it possible to reduce the cost of production to the level that may not be normally possible in the short run. Thus, firms may achieve higher level of efficiency in the long run than in the short run

Examples of products sold in monopolistic markets

-Electricity, water, gas, and regular postal service

General rule for determining optimal output for firms in any market and its application to firms in a perfectly competitive market

-For firms operating in any market, optimal output occurs where MR = MC when MC is increasing. -For firms operating in perfectly competitive markets, this rule can be modified as P = MC when MC is rising because MR = P at all levels of output.

Relationship between price and marginal revenue for firms in a perfectly competitive market

-For perfectly competitive firms, MR is always equal to P because each firm can sell its product as much as it wants to without reducing the price. TR = PQ MR = ΔTR/ΔQ = Δ(PQ)/ΔQ = PΔQ/ΔQ = P.

In the long run, perfectly competitive firms earn only normal profits because

-If they are earning economic profits in the short run, new firms will enter, supply will increase, price will decrease, and economic profits will decrease. This process will continue until all the economic profits disappear and the firms end up earning only normal profits. Thus, P = MC = AC. -If they are incurring economic losses in the short run, some firms will exit, supply will decrease, price will increase, and economic losses will decrease. This process will continue until all the economic losses disappear and the firms are able to earn at least normal profits. Thus, P = MC = AC. -Note that freedom of entry into or exit from the market is the reason perfectly competitive firms earn only zero economic profits in the long run.

Relationship between plant size and returns to scale

-In the long run, plant size is variable, even though it is fixed in the short run -As the plant size is increased, it will involve increases in the quantities of inputs used -Returns to scale refers to the impact of an increase in plant size on the output

Short-run vs. long-run equilibrium for firms in a perfectly competitive market

-In the short run, perfectly competitive firms may earn economic profits, incur economic losses, or earn only normal profits. Thus, P = MC but >, <, or = AC

Characteristics of perfectly competitive markets

-Large number of firms -Each firm small relative to market -Homogeneous or identical products -Easy entry into the market

Different forms of barriers to entry into monopolistic markets

-Legal barriers: Patents, licenses, certification requirements -Control of essential resources: Control of the supply of key inputs (e.g., De Beers Consolidated Mines of South Africa controls world's diamond mines) -Economies of scale: Only one firm operating on a large scale is able to produce the product at the lowest possible cost. Monopolies arising due to economies of scale are called natural monopolies.

Relationship between productivity and costs in the short run

-Productivity and costs are inversely related -When AP is increasing, AC decreases; when AP is maximum, AC is minimum; and when AP is decreasing, AC increases -When MP is increasing, MC decreases; when MP is maximum, MC is minimum; and when MP is decreasing, MC increases

Relationship between returns to scale and long-run average cost

-Returns to scale and long-run average cost are inversely related

Pricing behaviors of firms in a perfectly competitive market

-The price charged by a perfectly competitive firm is determined by market demand and market supply -Firms in perfect competition are price takers because each firm is small relative to the market and goods are perfect substitutes for one another -A firm in a perfectly competitive industry must take the market price because if it tried to increase its price above the market price, it may lose all customers as they would buy from other sellers. -On the other hand, if a perfectly competitive firm charges a price lower than the market price, the firm will make less profit than it could at the market price. Thus, it would not make economic sense for the firm to charge a price lower than the market price.

Short-run supply curves for firms in a perfectly competitive market

-The short-run supply curve of a perfectly competitive firm is the part of its marginal cost curve rising above the average variable cost curve. -Profit is maximized or loss is minimized when MR=MC where MC is rising -Q is the profit maximizing output. -AVC is minimum when AVC=MC -AT optimal output (profit maximizing or loss minimizing output) -P=MC or MR=MC when MC is rising

Economic Profit

1. Total Revenues-(Explicit+Implicit Costs)=Economic Profit 2. Accounting Profit-Implicit Costs=Economic Profit

Average Cost or Average Total Cost

Cost per unit of output. TC/Q or AFC+AVC

Increasing Returns to Scale

Output increases by a larger percentage than the increase in plant size

Decreasing Returns to Scale

Output increases by a smaller percentage than the increase in plant size

Constant Returns to Scale

Output increases by the same percentage as the increase in plant size

Marginal Cost

The amount by which TC changes when Q changes by one additional unit. MC = ∆TC/∆Q

Variable Cost

The cost of a variable input. changes with the quantity of output produced

Calculation of profits or losses for firms in a perfectly competitive market

Total Profit=Total Revenue-Total Costs -This is total economic profit because TC includes all the costs, explicit and implicit, and they are subtracted from TR -Thus, TR > TC => Economic profit TR < TC => Economic loss TR = TC => Zero economic profit or normal profit

Accounting Profit

Total Revenue-Total Explicit Cost

Average Variable Cost

Variable cost per unit of output. AVC = TVC/Q

Explicit Cost

a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, land lassanare those where no actual payment is made

Implicit Cost

the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent