Microeconomics Chapter 6&7

firms profit is equal to:

(P x Q) - (ATC x Q)

a firm is profitable if:

(P x Q) exceeds (ATC x Q)

profit is equal to:

(P-ATC) x Q

characteristics of markets that are perfectly competitive

1. all firms sale the same standardized product. 2. the market has many buyers and sellers, each of which buys or sales only a small fraction of the total quantity exchanged. 3. productive are mobile. 4. buyer's and sellers are well informed.

imperfectly competitive firm

A firm that has at least some control over the market price of its product

price taker

A firm that has no influence of the price at which it sells its product

profit-maximizing firm

A firm whose primary goal is to maximize the difference between its total revenues and its total cost

perfectly competitive market

A market in which no individual supplier has significant influence on the market price of the product

long run

A period of time of sufficient length that all the farms factors of production are variable

short run

A period of time sufficiently short that at least some of the firms factors of production are fixed

law of diminishing returns

A property of the relationship between the amount of a good or service produced in the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increase production of the good eventually requires even-larger increases in the variable factor

short-run shutdown condition

P x Q < VC for all levels of Q.

perfectly competitive market maximizes their profits by:

P=MC

producer surplus

The amount by which price exceeds the sellers reservation price

total cost

The sum of all payments made to the firms fixed and variable factors of production

fixed cost

The sum of all payments made to the firms fixed factors of production

variable cost

The sum of all payments made to the firms variable factors of production

profit

The total revenue a firm receives from the sale of its product minus all costs explicit and implicit incurred in producing it

profitable firm

a firm whose total revenue exceeds its total cost

the efficient (Pareto efficiency)

a situation is efficient if no change is possible that will help some people without harming others

accounting profit formula

accounting profit = total revenue - explicit cost

invisible hand theory

adam smiths theory that the actions of independent, self-interested buyer's and sellers will often result in the most efficient allocation of resources

economic loss

an economic profit that is less than zero

if buyer's and sellers are free to pursue their own self interest, according to the invisible hand theory, the result would be

an efficient allocation of resources

factor of production

an input used in the production of a good or service

variable factor of production

an input who's quantity can be altered in the short run

fixed factor production

an input who's quantity cannot be altered in the short run

barrier to entry

any force that prevents firms from entering a new market

marginal cost

as output changes from one level to another, the change in total cost divided by the corresponding change in output

economic surplus of buyer's (upper shaded triangle) economic surplus of producers (lower shaded triangle)

both triangles combined is economic surplus

allocative function of price

changes in prices direct resources away from overcrowded markets and toward markets that are underserved

rationing function of price

changes in prices distribute scarce goods to those consumers who value them highly

a decrease in the price the firm receives for its output will cause the firm to

contract output and earn smaller profits or larger losses

in general, price subsidies will _______ total economic surplus.

decrease

accounting profit

difference between a firm's total revenue and it's explicit cost

economic profit formula

economic profit = total revenue - explicit costs - implicit cost

in a free market economy the decisions of buyers and sellers are

guided by prices

marginal price rules

if price is greater than marginal cost, the firm can increase its profit by expanding production and sales. If price is less than marginal cost, the firm can increase its profit by producing and selling less output.

the lemonade stands are perfectly competitive because

it is easy to open a stand and easy to close it down

market equilibrium is efficient if:

it's not possible to find a transaction that will help some people without harming others

in general, if the price of a fixed factor of production increases,

marginal cost are unchanged

the shutdown condition applies

only in the short run

The total economic surplus for a market is thought of as a pie to be divided among the participants in the market, and imposing price controls will:

reduce the size of the pie

which of the following would be an example of the allocative function of price

switching from a PhD in economics to finance because finance salaries are higher

economic rent

that part of the payment for a factor of production that exceeds the owners reservation price, the price below which the owner would not supply the factor

explicit cost

the actual payments a firm makes to its factors of production and other suppliers

marginal cost is calculated as

the change in total costs divided by the change in output

economic profit

the difference between a firms total revenue and the sum of its explicit and implicit costs

if a firm is earning zero economic profit, then:

the firms accounting profit is equal to the firms implicit costs

the market demand and supply curves intersect to determine:

the market price of the product

if all firms in a perfectly competitive industry earn a normal profit, then

the number of firms in the industry are stable

normal profit

the opportunity cost of the resources supplied by a firms owners, equal to accounting profit minus economic profit

implicit costs

the opportunity costs of the resources supplied by the firms owners

average total cost (ATC)

total cost divided by total output

which of the following statements best characterizes the inefficiency caused by a price floor

trades that benefit both the buyer and seller are available at prices less than the price floor

true or false: for a firm to remain open in the long run, it must earn an economic profit greater than or equal to zero.

true

individual supply curves generally slope ______ because _______.

upward; the easiest tasks are completed first

average variable cost is defined as

variable cost divided by output

average variable cost (AVC)

variable cost divided by total output

Equilibrium Principle (No Cash on the Table Rule)

when a market reaches equilibrium, no further opportunities for gain are available to individuals