Econ Midterm II

consumer surplus & producer surplus

(all together is social surplus)

How would the introduction of legal or technical barriers affect the long run equilibrium in a perfectly competitive market?

It would reduce any downward pressure on prices from entry and allow economic profits in the long run.

Not a measure of Elasticity

behavioral elasticity of demand.

on a graph, consumer surplus is the area

below the demand curve and above the price

A firm is producing goods in a market where the market price is less than the​ firm's average total cost but greater than its average variable cost. At this point the firm​ should:

continue to operate at a loss

Total Cost

fixed cost + variable cost

Sunk cost

idea to shut down because of a sunk cost is FLAWED because it SHOULD NOT affect current and future decisions (you ignore them)

When is an outcome Pareto Efficient

if no individual can be made better off without making someone else worse off (when market in equilibrium) -market size has nothing to do with pareto efficency

Do all consumers in a competitive market enjoy the same amount of consumer surplus?

no, since considerable variation exist among consumers in terms of tastes and income

Elasticity is less than 1, greater than zero

normal good

a firm with positive economic profits would

not choose to exit and industry

income elasticity of demand

percent change in quantity demanded/ percent change in income

the goal of a business in a perfectly competitive market is to maximize

profits

all else being equal, the flatter the demand & supply curve, the

smaller the social surplus in the market

*fixing houses question* This problem tells us that one of the sources of economies of scale is

specialization

in the long run, the supply curve for a perfectly competitive firm is represented by

the portion of the marginal cost curve above average total cost.

Short run curve for a perfectly competitive firm is represented by

the portion of the marginal cost curve above the average variable cost

A perfectly competitive firm will choose to shutdown when...

the price (MR) intersects marginal cost curve below the AVC curve

"The table below shows the total cost for a firm that manufactures bags. If the market price were​ $10 per​ bag, this firm would produce ?"

the question gives only output and total cost. Find marginal cost. Pick the output that is less than the market price. (next output higher would exceed the market price)

The Production Function

the relationship between the quantity of inputs used and the quantity of outputs produced

If some sellers exit a competitive market, what will happen to the supply curve and the equilibrium?

the supply curve will shift left and equilibrium price will increase & equilibrium quantity will decrease

Consumer Surplus

the value or total benefits one receives from a good in excess for the price paid for it

For an individual, consumer surplus is calculated as the difference between

the willingness to pay and the price actually paid for it

A firm with positive accounting profits might still choose

to exit an industry

Total Variable Cost

total cost- fixed cost

Average Total Cost

total cost/ output

What would maximize social surplus?

trade at the competitive market equilibrium

In a perfectly competitive​ market, all of the following are true​ except:

true: Sellers are​ price-takers. Entry into the market is unrestricted. The products sold are basically homogeneous. NOT TRUE: The market supply cannot affect the retail price.

In a perfectly competitive market, an increase in the market price shifts the marginal revenue curve...

up, increasing the quantity supplied

Average Variable Cost

variable cost/ output

Considering a good you do not like, what would your consumer surplus be for that good?

zero, since not liking the good implies not paying anything and zero, unless someone is paying you to have that good

Bilateral Negotiations often lead to prices that

approach the theoretical equilibrium price

a firm is experiencing economies of scale when its

Average TOTAL cost declines as more output is produced

Average Fixed Cost

Fixed Cost/ Output

Describe the long-run competitive market if DEMAND were to increase

Market price increase, economic profits increase, short-run market supply increase, long-run supply settles at minimum ATC

Suppose one firm accounts for 55 percent of the global market share for a​ product, while 147 other firms account for the remaining 45 percent of the market. With such a large number of buyers and​ sellers, is this market likely to be​ competitive?

No, even though there are many firms in the​ market, there is one firm large enough to influence the market price

All firms in a perfectly competitive market are said to be​

Price Takers

Is producer surplus always equal to​ profit?

Producer surplus equals profit when marginal cost and average total cost can be represented with the same curve.

Would a​ profit-maximizing firm continue to operate if the price in the market fell below its average cost of production in the short​ run?

Yes, but only if price stayed above average variable cost.

when ATC curve in increasing

diseconomies of scale

Total Fixed cost

doesnt change

negative elasticity

inferior goods

In a perfectly competitive market, when firms enter and exit the market...

it is a good sign that the market is working

Elasticity is greater than one

luxury good

equilibrium is when

marginal cost is = to the price

problem about two plants (given TC, ATC, & MC)

maximizing when MC=P total profit= subtracting the total costs of each plant at maximizing

Relationship between MC and ATC curve

- When ATC curve in decreasing, MC curve is below the ATC curve - When ATC curve is increasing, MC curve is above the ATC curve

Marginal Cost

change in total cost/ change in quantity

A market where sellers orally state asks and buyers orally state offers is known as​ a:

double oral auction

Deadweight Loss

the decrease in social surplus that results from a market distortion

Walmart and Target are both discount retailers.​ However, during the Great Recession of​ 2009, Target's​ same-store sales fell while sales at Walmart actually increased. Why?

- Target positions itself in the market as a​ low-cost retailer of home accessories and clothing. - Walmart stocks more goods like food and health items than Target.

Even though the price of an acre of land increased from​ $6,000 to​ $10,000, the quantity supplied did not change. What is price elasticity of supply?

0, perfectly inelastic

1) in the short run, the equilibrium price will be 2) if firms are free to enter and exit the market, in the long-run the price will be

1) the marginal cost 2) the largest number ?

Why would consumer surplus reduce?

Some existing buyers no longer consume the good

"Assuming free entry and exit of other​ firms, based on the ATC​ curve, the price in the long run will be..."

TC/Q of that ^ specific output

the long run supply curve is the portion of the MC curve

above the ATC curve

All of the following could cause an increase in producer surplus​ except:

can cause an increase: higher equilibrium price a shift in the market demand curve a downward shift in the marginal cost curve CANT: an upward shift in a marginal cost curve

when ATC curve is constant

constant returns to scale

in a perfective competitive market, a firm with multiple production plants will minimize total costs of production when

each plant produces where marginal revenue equals marginal cost

when ATC curve is decreasing

economies of scale

All of the following are factors in a​ firm's elasticity of supply​ except:

factors: inventories time labor NOT FACTOR: market price

You read a story in the newspaper about a car company that has recently been fined five billion dollars by government regulators. The fine is for past infractions that are no longer relevant to how the firm will produce cars going forward. The story contains the statement​ "clearly, the company will now need to raise prices in order to recover this​ loss." If it is impossible for the company to pay its​ obligations, the company should

file for bankruptcy

The difference between accounting profits and economic profits is

implicit costs

Suppose there is a product that is being sold in a perfectly competitive market. if market price of product rises, then producer surplus will

increase b/c more areas between supply curve and market price

Producer Surplus

the difference between the price consumers pay and the supply curve 1/2 bh (bottom part of triangle)

In a competitive market, if economic profits exist then

the market supply curve will shift rightward and the price will decrease