exam 3 econ chapter 12

Marginal revenue (MR)

The change in total revenue from selling one more unit of a product.

natural monopoly

a situation in which economies of scale are so large that one one firm can supply the entire market at a lower average total cost than can two or more firms

network externalities

a situation in which the usefulness of a product increases with the number of consumers who use it

marketing

all the activities necessary for a firm to sell a product to a consumer

In this case, the long-run supply curve will slope upward. Industries with upward-sloping long-run supply curves are called

increasing cost industury

remember that the supply curve for a firm tells us how many units of a product the firm is willing to sell at any given price.

. Notice that the marginal cost curve for a firm in a perfectly competitive market tells us the same thing. The firm will produce at the level of output where MR = MC. Because price equals marginal revenue for a firm in a perfectly competitive market, the firm will produce where P = MC.

Economic profit

Economic profit A firm's revenues minus all of its implicit and explicit costs.

Firms can differentiate their products through marketing,

Firms can differentiate their products through marketing,

A narrow definition of monopoly that some economists use is that a firm has a monopoly if it can ignore the actions of all other firms

For example, candles are a substitute for electric lights, but your local electric company can ignore candle prices because however low the price of candles becomes, almost no customers will give up using electric lights and switch to candles. Therefore, your local electric company is clearly a monopoly.

Not only do perfectly competitive firms produce goods and services at the lowest possible cost, they also produce the goods and services that consumers value most.

In other words, firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them. This result holds because:

The bad thing

It receives $0.50 less for each sandwich that it could have sold at the higher price; we can call this the price effect.

The good thing.

It sells 1 more sandwich; we can call this the output effect.

The market demand curve is determined by adding up the quantity demanded by each consumer in the market at each price

Similarly, the market supply curve is determined by adding up the quantity supplied by each firm in the market at each price

Shutdown point

The minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

Average revenue is equal to total revenue divided by quantity.

Therefore, average revenue is always equal to price.

A trademark grants a firm legal protection against other firms using its product's name.

aka brand names

collusion

an agreements among firms ti charge the same price otherwise not to compete

patent

gives a firm the exclusive right to a new product for a period of 20 years from the date the patent application is filed with the government

Monopoly

is a firm that is the only seller of a good or service that does not have a close substitute.

Productive efficiency

refers to the situation in which a good is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of the average total cost curve.

market power

the ability of a firm to change a price greater than marginal cost

brand management

the actions of a firm intended to maintain the differentiation of a product over time

economic cost

the situation in which a firm's total revenue is less than its total cost, including all implicit costs.

We have seen that if a firm is experiencing a loss, it will shut down if its total revenue is less than its variable cost:

* Total revenue < Variable cost, *(P × Q) < VC. *P<AVC.

All firms use the same approach to maximize profit: They produce the quantity where marginal revenue is equal to marginal cost

o your local Panera will maximize profit by selling the quantity of sandwiches for which the last sandwich sold adds the same amount to the firm's revenue as to its costs

But this result holds only if the firm stands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

. To stay one step ahead of its competitors, a firm has to offer consumers goods or services that they perceive to have greater value than those that competing firms offer. Value can take the form of product differentiation that makes the good or service more suited to consumers' preferences, or it can take the form of a lower price.

Price taker

A buyer or seller that is unable to affect the market price.

Sunk cost

A cost that has already been paid and cannot be recovered.

sunk cost

A cost that has already been paid and cannot be recovered. We assume, as is usually the case, that the firm cannot recover its fixed costs by shutting down We assume, as is usually the case, that the firm cannot recover its fixed costs by shutting down

Long-run supply curve

A curve that shows the relationship in the long run between market price and the quantity supplied.

market definition

A market consists of all firms making products that consumers view as close substitutes. Economists can identify close substitutes by looking at the effect of a price increase. If the definition of a market is too narrow, a price increase will cause firms to experience a significant decline in sales—and profits—as consumers switch to buying close substitutes.

perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

productive efficiency

A situation in which a good or service is produced at the lowest possible cost. As we have seen, perfect competition results in productive efficiency.

allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.

Recall that a firm in a perfectly competitive market faces a perfectly elastic demand curve that is also its marginal revenue curve. Therefore, the firm maximizes profit by producing the quantity where price equals marginal cost.

As panel (a) of Figure 13.6 shows, in long-run equilibrium, a perfectly competitive firm produces at the minimum point of its average total cost curve.

Once a firm has succeeded in differentiating its product, it must try to maintain that differentiation over time through brand management

As we have seen, whenever a firm successfully introduces a new product or a significantly different version of an old product, it earns an economic profit in the short run. -Firms use brand management to postpone the time when they will no longer be able to earn an economic profit.

The key to earning an economic profit is either to sell a differentiated product or to find a way of producing an existing product at a lower cost.

If a monopolistically competitive firm selling a differentiated product is earning a profit, the profit will attract the entry of additional firms, and the entry of those firms will eventually eliminate the firm's profit.

To understand why profit is maximized at the level of output where marginal revenue equals marginal cost, remember this key economic principle:

Optimal decisions are made at the margin.

This equation tells us that profit per unit (or average profit) equals price minus average total cost. Finally, we obtain the equation for the relationship between total profit and average total cost by multiplying by Q:

Profit=(P−ATC)×Q -This equation tells us that a firm's total profit is equal to the difference between price and average total cost multiplied by the quantity produced.

Profit=(P−ATC)×Q.

Profit=(P−ATC)×Q.

long-run competitive equilibrium

The situation in which the entry and exit of firms has resulted in the typical firm breaking even.`

Average revenue (AR)

Total revenue divided by the quantity of the product sold.

profit

Total revenue minus total cost

Every firm that has the ability to affect the price of the good or service it sells will have a marginal revenue curve that is below its demand curve.

on;y firms in perfectly competitive markets which can sell as many units as they want at the market price, have marginal revenue curves that are the same as their demand curves.

Allocative efficiency

refers to the situation in which every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost.

antitrust laws

laws aimd at elimintaing collusion and promoting among firms

Vertical mergers

a merger between firms at difeferent tages in the production of a good

horizontal merger

a merger between firms in the same indusry

In the short run, a firm experiencing a loss has two choices:

1. Continue to produce 2. Stop production by shutting down temporarily

In fact, for any level of output, a firm's average revenue is always equal to the market price.

AR=TR/Q=(P×Q)/Q=P

We measure consumer surplus as the area below the demand curve and above the market price.

Because a monopoly raises the market price, it reduces consumer surplus.

We measure producer surplus as the area above the supply curve and below the market price

Because rectangle A is larger than triangle C, we know that a monopoly increases producer surplus compared with perfect competition.

Government Action Blocks Entry

By granting a patent, copyright, or trademark to an individual or a firm, giving it the exclusive right to produce a product By granting a firm a public franchise, making it the exclusive legal provider of a good or service

Prices in perfectly competitive markets are determined by the interaction of demand and supply for the good or service.

Consumers and firms have to accept the market price if they want to buy and sell in a perfectly competitive market.

To defend a brand name, a firm can apply for a trademark, which grants legal protection against other firms using its product's name.

Firms that sell their products through franchises rather than through company-owned stores encounter the problem that if a franchisee does not run his or her business well, the firm's brand may be damaged. Firms can take steps to keep such damage from happening. For example, automobile firms send "roadmen" to visit their dealers to make sure the dealerships are clean and well maintained and that the service departments employ competent mechanics and are well equipped with spare parts. Similarly, McDonald's sends employees from corporate headquarters to visit McDonald's franchises to make sure the bathrooms are clean and the French fries are hot.

Because monopolies do not face competition, every firm would like to have a monopoly. But to have a monopoly, barriers to entering the market must be so high that no other firms can enter. Barriers to entry may be high enough to keep out competing firms for four main reasons:

Government action blocks the entry of more than one firm into a market. One firm has control of a key resource necessary to produce a good. There are important network externalities in supplying the good or service. Economies of scale are so large that one firm has a natural monopoly.

Of course, it is possible that a monopolistically competitive firm will suffer an economic loss in the short run. As a consequence, the owners of the firm will not be covering the opportunity cost of their investment. We expect that, in the long run, firms will exit an industry if they are suffering an economic loss.

If firms exit, the demand curve for the output of a remaining firm will shift to the right. -This process will continue until the representative firm in the industry is able to charge a price equal to its average total cost and break even. -This process will continue until the representative firm in the industry is able to charge a price equal to its average total cost and break even.

. As long as this Panera is making an economic profit, there is an incentive for additional restaurants to open in the area and sell turkey sandwiches, and the demand curve will continue shifting to the left. As panel (b) shows, eventually the demand curve will have shifted to the point where it is just touching—or tangent to—the average total cost curve.

In the long run, at the point where the demand curve is tangent to the average total cost curve, price is equal to average total cost (point B), the firm is breaking even, and it no longer earns an economic profit. In the long run, the demand curve is also more elastic because the more restaurants there are in the area, the more sales this Panera will lose to other restaurants if it raises its price.

you can see that the key difference between the monopolistically competitive firm and the perfectly competitive firm is that the demand curve for the monopolistically competitive firm slopes downward, while the demand curve for the perfectly competitive firm is a horizontal line

The demand curve for the monopolistically competitive firm slopes downward because the good or service the firm is selling is differentiated from those being sold by competing firms. The perfectly competitive firm is selling a good or service identical to those being sold by its competitors

As new restaurants open near your local Panera, the firm's demand curve will shift to the left. The demand curve will shift because the Panera will sell fewer sandwiches at each price when there are additional restaurants in the area.

The demand curve will also become more elastic because consumers have additional restaurants from which to buy turkey sandwiches, so the Panera will lose more sales if it raises its prices. Figure 13.5 shows how the demand curve for your local Panera shifts as new firms enter its market.

Even during a temporary shutdown, however, a firm must still pay its fixed costs. For example, if the firm has signed a lease for its building, the landlord will expect to receive a monthly rent payment, even if the firm is not producing anything that month.

The firm will shut down if producing would cause it to lose an amount greater than its fixed cost.

Consumers, therefore, are better off than they would have been had these companies not differentiated their products.

We can conclude that consumers face a trade-off when buying the product of a monopolistically competitive firm: They are paying a price that is greater than marginal cost, and the product is not being produced at minimum average cost, but they benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

For a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue.

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To maximize his profit, Farmer Parker should produce the quantity of wheat where the difference between the total revenue he receives and his total cost is as large as possible.

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copy right

a government license that grants an author exclusive rights to publish and sell creative works

public franchise

a govt designation that a firm is the only legal provider of a good or service For example, state and local governments often designate one company as the sole provider of electricity, natural gas, or water.

in graph i

if total revenue is greater than total cost, you earn economic profit

Recall that in the short run, at least one factor of production is fixed, and there is not enough time for new firms to enter the market

the marginal cost curve has a U shape. We will assume that the marginal cost curve for this Panera has the usual shape.