Econ Exam 3 connect ?s
the amount of revenue produced per unit of an output sold is the ___ revenue
average
fixed costs
costs that do not change with the amount of output produced -materials
what 2 things should you considers about how much output it should produce to max profits
-MR -MC
economic profit formula
EC=TR-Economic costs
the efficiency loss resulting from a monopolist market is called
a deadweight loss
marginal costs:
can only equal the average cost when the marginal cost is risinig -will cause the average cost to rise only if the marginal cost is rising
the ___, the average revenue, and the marginal revenue curves for a perfectly competitive firm are the same horizontal line at the market price
demand
___ of scale is a condition in which the long-run average total cost of production increases as production increases
diseconomics
the level of profit that occurs when total revenue is ___ to total cost is known as normal profit
equal
when a firm shuts down in the short run, it must still pay the ___ costs
fixed
if the market price is below the average variable cost, the firm is
losing money in the short run and should shut down
___ reduce the ability of goods and services and consumers ability to but those goods
monopoly
a pure ___ has the overall demand to itself, because it is the only seller in the market
monopoly
in a perfectly competitive market , homogeneity means that firms must charge the market price for the goods or the services they produce because:
there are hundred of other perfectly good subs -the market is competitive
marginal > average
average increases
conditions for closing down
TR<TVC P< minimum AVC
if MC>ATC the ATC curve must be
rising
economic profit
the level of profit that occurs when TR > TC
costs that change with the amount of output are ___ costs
variable
you close down in the short run when
1. TR<TC 2. AR=P < minimum AVC
marginal = average
average stays the same
business operating decisions should be based on ___ profit
economic
variable inputs
inputs that can be changed relatively quickly -ex labor
explicit costs are also known as _____ costs
accounting
market structure
1. number of firms in the industry 2. similarity of products (goods and services) 3. knowledge of the market by key players 4. ease of entry and exit in the industry
Pure monopoly
1. Number of firms: one 2. Power to set prices: yes 3. Nature of produce: unique 4. Ease of entry and exit: hard
Average product equation
Q/L
average total cost
TC divided by the amount of output produced; total cost per unit
average fixed cost
TFC divided by the amount of output; fixed cost per unit
average fixed cost equation
TFC/Q
total revenue minus explicit costs of production is ___ profit
accounting
the vertical distance between the average variable cost and the average cost curves is equal to
average fixed costs -AFC=ATC-AVC
how do you know if you should stay in business or shut down
compare profits of staying in business or profits of shutting down.
a perfectly ___ market is characterized by a large number of ___ producing a ___ product and taking the market ___ as given, witch easy entry and exit into the market
competitive, firms, standardized, price
if MC=ATC the ATC curve must be
minimum
total cost equals -tfc+tvc -afc+tvc -mfc+tvc -tfc+avc
tfc+tvc
if selling another unit of output increases revenue, demand is
elastic
zero economic profit
no incentive for resources to leave or enter
normal profit is also known as ___ economic profit
zero
total revenue minus the explicit costs of production is _____ profit
accounting
___ profit creates an incentive for other perfectly competitive firms to enter the market
economic
the demand for a perfectly competitive product is a ___ line originating at the market price
horizontal
the level of profit that occurs when the total revenue is less than the total cost is
loss
the market condition in which firms do not face incentives to enter or exit the market and firms earn a ___ profit is known as long run equilibrium
normal
economic costs
the costs associated with the use of resources; the sum of explicit and implicit costs
account profit
total revenue minus the explict costs of production
IF MR>MC, total profits will rise by how much
the difference between MR and MC
the shape of the long run average total cost curve can differ for different types of firms
true
a compant can break even and meet operating costs without a loss when it earns a ___ economic profit
zero
fixed inputs
inputs that cannot be changed in a short period -factory
Average product of labor
the level of output divided by the level of the input -AP=Q/L
conditions necessary to carry out successful price discrimination
-firms must have price setting power -markets must be separable (cannot resell the good) -markets must be subject to different price elasticities of demand
all firms maximize profits by producing the quantity of output at which the marginal ___ is equal to the marginal ___
cost revenue
in economics, we refer to a situation in where there is only one firm but no real ___ to entry as a contestable market
barriers
the level of profit that occurs when total revenue is equal to total cost is known as ____ profit
normal
allocative efficiency
occurs when resources are allocative among the firms in a way so that society has a mix of goods it wants the most
the total amount of output produced with a given amount of resources is known as the total
product
long run
a period of time over which all inputs are free to vary
profit maximizing rule for all market structures
-choose output level where MR=MC -set the price by going to the demand curve at the Q where MR=MC -Total profit = total revenue - total cost -average profits or profit per units = P-ATC
price takers
firms that take or accept the market price and have no ability to influence the price
Total fixed costs divided by the amount of output produced is equal to average total cost marginal cost average fixed cost average variable cost
AVC
marginal product is the
additional output produced as a result of more unit of a variable resource
marginal revenue
additional revenue associated with the sale of an additional unit
zero ___ profit or normal profit is the revenue needed for a company to break even and meet operating costs without a loss
economic
long run equlibrium
market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit, Generally it occurs when the market price is equal to the minimum average total cost faced by firms
total costs
the sum of the fixed and variable costs of production
total product
the total amount of output produced with a given amount of resources
total ___ costs change with output, where as total ___ does not
variable, fixed
total ___ costs change with outputs, where as ___ costs do not
variable, fixed
Profit
Average revenue > Average total cost
total fixed costs
TFC= the sum of the fixed costs (building, labor, machines) which equal the sum of the costs that do not vary as the level of output changes`
accounting profit
TR - Explicit cost
average variable cost
TVC divided by output produced; variable cost per unit
pure monopoly
a market structure in which one firm accounts for 100% of industry sales -pure = no good substitutes. the cross-price elasticity of demand is 0 -price maker
long run
a period of time in which all inputs of production are variable
average revenue is the
amount of revenue per unit of a product sold
generalizations about the law of diminishing returns
an empricial generalization -technology assumed constant -at least one input constant -variable proportions between inputs must be possible.
law of diminishing returns
as the quantity of one variable input is used in the production process is increased, holding other inputs fixed a point will eventually be reached at which the additions to output will become smaller.
the vertical distance between the average variable cost and the average total cost curve is equal to
average fixed cost
which of the following are the reasons for breaking average total cost into two components?
average variable cost is used to determine whether a firm should continue to operate or should shut down in the short run -the constantly declining average fixed cost is apparent
if the marginal revenue associated with selling one more unit of output is positive, the demand is
elastic, becuase it would increase total revenue
Economic costs
explicit+implicit costs
diseconomies of scale is a condition in which the long run average cost of production ___ as production increases
increases
_____ marginal returns is a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than of the previous variable resource
increasing
if a company decided to produce zero units of output`
it still has to pay fixed costs of production
the shape of the marginal cost curve is dependent on the
law of diminishing marginal returns
in the presence of economic losses, firms ___ a perfectly competitive market until the market reaches the point at whiich the firms are generating a ___ profit; then entry stops, and the market settles into its long run equilibrium
leave, normal__
at the shut down point, the price is ___ the average variable costs
less than
what is true about the firm in this case of the monopolist
since the monopolist is the maker, the firm and marker coincide because the monopolist produces 100% of industry output.
average product is the
the amount of output produced per unit of a resource employed
changes in the variable costs of resources will affect
the marginal costs faced by firms
being able to calculate total product, average product, and marginal product is important
to operate efficiently and max profits
Marginal product equation
ΔQ/ΔL
marginal costs equation
ΔTVC/ΔQ = ΔTC/ΔQ
suppose demand rises. how would this affect the profit maximizing level of output and price?
price increases, demand falls. MR>MC
average revenue = what
price of a good or service
monopoly power is the ability of a monopoly to influence ___ by controlling the ____ that it produces in the market
price, output
when the total revenue earned by a firm is less than the total cost of production, the firm faces a
loss
to calculate the profit, which three pieces of information need to be identified?
price quantity average total cost
loss
the level of profit that occurs when total revenue is less than total costs TR<TC
normal profit
the level of profit that occurs when totoal revenue is equal to total costs. this level indicated that a firm is doing just as well as it would have if it had chosed to use its resources to produce a diffrerent product or compete in a different industry -also known as 0 economic profit
minimum efficiency scale
the lowest level of output at which the longest run average total cost is minimized
marginal product
the marginal product of labor equals the change in total product per period of time associated with hiring one extra unit of labor MP=ΔQ/ΔL
Pure monopoly and price making
the monopolist firm can only charge one price -the only way it can sell more output is to lower the price -because it must lower the price, that means that the MR<price -although the monopolist will be able to sell more output at lower price, it will loose revenue on items it was previously selling at a higher price.
implicit costs
the opportunity costs of using owned resources; costs for which monearty payment is explicitly made.
implicit costs
the opportunity to a firm of using resources owned by the firm itself - you have to assign a value to the resources -the opportunity cost of you selling the resources outside of the firm
production function
the physical relationship between inputs and output 1. theres one variable input, labor. 2. output is a function of units of labor (this is short run production function) 3. all labors is just alike (homogeneous)
price discrimination
the practice of selling the same good or service to different consumers at different prices
explicit costs
these are actual dollar payments by the firm for resources used in the production process that are owned by others. for example, payments made for electricity, rent, fuel, and transportation services would qualify -the $ payments in markets provide a measure of the input purchased in its next best alternative
price discrimination curve
total profit charging one price = area of shaded square -total profit with price discrimination is the area above the square and below the demand curve
total costs
total variable cost + total fixed costs
there are few important exceptions in which monopolies are actually encouraged to incentivize positive outcome T or F
true
in addition to total cost, it is useful to calculate average cost because
-average cost numbers are more useable for managing -average cost can be compared directly to the price
an argument can be made that the economic profits generated by pure monopolies have two positive impacts on dynamic growth
-potential economic profits gives firms and entrepreneurs incentives to develop new productive processes and products -when a monopoly earns an economic profit, it has the financial capital to develop more innovations
oligopoly
1. Number of firms: a few 2. Power to set prices: yes 3. Nature of produce: differentiated or standardized 4. Ease of entry and exit: hard
monopolistic competition
1. Number of firms: many 2. Power to set prices: yes 3. Nature of produce: differentiated 4. Ease of entry and exit: easy
pure competition
1. Number of firms: many, all small 2. Power to set prices: none 3. Nature of produce: homogeneous 4. Ease of entry and exit: easy
perfect competition
1. a large number of buyers implications: no one consumer nor one producer that can influence the price. No single firm can change price 2. homogeneous (standardized) products Implications: consumers don't care where they buy the good. As long as it is the cheapest 3. Perfect knowledge ont he part of buyers and sellers implications: consumers know the price, buys from seller who chargest the lowest price 4. easy entry and exit from the market
what have we learned about pure competition and pure monopoly?
1. market power is iindicated when the firm has the power to set prices 2. market power exists when the firm faces a downward sloping demand curve 3. competitive firm is a price taker and cannot affect the price 4. the pure monopoly is a price maker. It can affect the price 5. the monopolist firm produces an output on the elastic proportion of the demand curve
a person who has been managing a dry cleaning store for $30,000 per year decides to open her own dry cleaning store. the expenses are 35,000 for salaies, 10,000 for supplies, 8,000 for rent, 2000 for unitiliies and 5000 for interest on a bank loan. the revenues of the store during the first year of operations are 100000. the total account profit is
40,000
accounting profit formula
AP=TR-EC
Variable cost per unit is equal to: -afc -atc -avc -mc
AVC =tvc/q
average total costs equation
AVC+AFC = TC/Q
firm has market power when Mr ? AR
MR<AR
any firm, if it produces and output greater than 0 should contrast output when
MR<MC -either take the loss or shut down.
we know that a pure monopoly is a price maker
MR<P so that the profit maximizing rule stays the same -monopolist chooses the output level where MR=MC -then he finds the price by reading the demand curve at the output level where MR=MC
we know now that a perfectly competitive firm is a price taker
MR=price=AT=demand -the profit maximizing rule for perfect competition can therefore be written as P=MC
Any firm, if it produces an output greater than Zero should, expand output when
MR>MC -stay in business
total revenue equals
PxQ
economic profit
TR-Economic costs, which include both explicit and implicit costs
total variabel costs
TVC = at a given output the total costs of all variable inputs (unskilled labor, materials, electricity). TVC changes as output changes *assume* one variable input - labor -wage rate per unit of time = 1$ -TVC = Price per unit of the input
total cost equation
TVC+TFC
average variable costs equation
TVC/Q
the marginal cost curve is___-shaped
U
price taker
a buyer or seller who cannot affect the market price
increasing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is greater than the rest of the previous resource
diminishing marginal returns
a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than the previous variable resource
economies of scale
a condition in which the long-run average total costs of production decreases as productions increases
diseconomies
a condition in which the long-run average total costs of production increases as production increases
constant returns to scale
a condition in which the long-run average total costs of production remains constant as production increases
short run average total cost curve (ATC)
a curve showing the average total cost for different levels of output when at least one input of production is fixed, typically plant capacity
long run average total cost curve (LRATC)
a curve showing the lowest average total cost possible for any given level of output when all inputs of production are variable
natural monopoly
a monopoly from competition by technological barrier to enter or by ownership of unique natural resources -it arises because a single firm can supply a good or service to an entire market at a similar cost than two or more firms. -its easier for 1 firm to produce the whole market then for 2 firms to spit it up.
franchised monopoly
a monopoly protected from competition by a government grand of a monopoly privilege such as an exclusive license, permit, or patent. these can be in the form of patents, lincenses, or copyrights.
short run
a period of time in which at least input of production is fixed
the short run is
a period of time in which at least one input of production is fixed
short run
a period over time which at least one input is fixed
zero ___ profit means that the value of economic profit is negative
accounting
zero ____ profit means that the value of economic profit is negative
accounting
if MC=AVC the AVC curve must be
at its minimum
suppose demand falls. How would this affect the profit maximizing level of output and price? ex. income
at original q when demand falls to Mc>MR -price goes down and so does quantity
suppose the price of an input in the production falls. how would this affect the profit maximizing level of output and price?
at the original Q1 when the input price falls MR>MC. When price of an input falls, the supply increases -lowered the price of an input so MC shifts to the right. The company expands. Mr>MC MC=Supply curve
suppose the price of input in the production process rises. How would this affect the profit maximizing level of output and price?
at the original Q1 when the input price rises, MC>MR - she curve shifts to the left so the company contracts.
a curve showing the ___ total cost for different levels of output when at least one input of production is fixed, typically plant capacity, is the short run average cost curve
average
when marginal cost falls below the average cost, the ___ cost should be decreasing
average
marginal < average
average decreases
total cost divided by the amount of output produced is equal to
average total cost -ATC=TC/Q
negative economic profit
incentive for more resources to leave
positive economic profits
incentives for more resources to enter
one potential reason diseconomies of scale could exist is that a firm
cannot perfectly replicate its production when it expands
a condition in which the long-run average total cost of production remains constant as production increases is called
constant returns to scale
a condition in which the long-run average total cost of prodution remainis constant as production increases is called
constant returns to scale
in a perfectly competitive market, we assume the product is identical in the minds of
consumers
for profit-maximizing level of output, the price charged by a monopoly is not just different but greater than marginal ___
cost
suppose owners of the firm use their own money to start up and run a business. The owners used 100,000 of their own money that was earning an annual market return rate of 10% -what is the implicit opportunity cost to the owners of using their savings to start up the business?
cost is a flow concept and costs 10% so its 10,000 per year
variable costs
costs that change with the amount of output produced, increasing as production increases and decreaing as production decreases -ex: labor
economics of scale
is a condition in which the long-run average total cost of production decreases as production increases
____ marginal returns are a characteristic of production whereby the marginal product of the next unit of a variable resource utilized is less than that of the previous variable resource
decreasing
___ profit creates and incentive for other perfectly competitive firms to enter the market
economic
positive ___ profits encourage more firms to enter the market to produce goods
economic
in the presence of ___ profits, firms enter unitl the market reaches the point at which the firms are generative a ___ profit; then entry stops and the market settles into its ___ run equilibrium
economic, normal, long
the more substitutes there are for a product, the more ___ the demand for that product will be
elastic
the two conditions that guarantee consumers will enjoy the lowest prices possible are:
every firm producing the exact same product -individual firms are price takers
the decision to shut down temporarily is a short run decision to ___ an industry can be made only in the long run
exit
because the cost of a container is proportional to its surface area, by doubling the diameter of a container, a producer can
experience economics of scale
total revenue minus the total ___ explicit costs of production is accounting profits
explicit
total revenue minus the total ____ costs of production is accounting profit
explicit
when Q rises and Mr<MC then profits will
fall contract decrease output
if MC<ATC the ATC curve must be
falling
if MC<AVC the AVC curve must be
falling
increasing margnal returns is a characteristic of production whereby the marginal product of the next unit of a variable resource utalized is ___ than that of the previous variabel resource
greater
marginal values drive average values because
if the marginal value is above or below the average value, it will pull the average value up or push it down
costs for which no monetary payment is explicitly made are ___ costs
implicit
Total revenue minus the total ____ and total ____ costs of production is economic profit
implicit , explicit
an opportunity cost is associated with any cost, whether it is an ____ cost or and _____ cost
implicit, explicit
economic costs can be defined as the sum of ___ and ___ costs
implicit, explicit
total revenue minus the total ___ and total ___ costs of production is economic profit
implicit, explicit
economics of scale can result from a variety of factors, including
lower costs of inputs as firms purchase larger quantities -productivity gains from a more specialized labor
a business will charge a ___ price to the group with the relatively more elastic demand and a ___ price to the group with the relatively more inelastic demand
lower, higher
the curve showing the ___ average total cost possible for any given level of output when all inputs of production are variable in the long run average cost curve
lowest
extra or additional revenue associated with the production of an additional unit of output is the ___ revenue
marginal
for a perfectly competitive firm, the market price is equal to
marginal revenue -average revenue -demand
short run curve
marginal revenue intersects ATC and AVC at their lowest point.
in the short run, the supply curve for a fiirm is the ___ cost curve above or equal to the average ___ cost curve
marginal variable
profit ___ implies that perfectly competitive firms should expand production up to the point where marginal revenue equals marginal cost
maximization
explicit
monetary payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by other. Also known as accounting costs
when Q rises and Mr=MC then profits will
not change
productive efficiency
occurs when output is produced at least cost
a curve showing the average total cost for different levels of output when at least ___ input of production is fixed, typically plant capacity, is the short-run average cost curve
one
one reason for diseconomies of scale is increasing ___ costs
opportuinty
costs that do not change with the amount of ___ produced are fixed costs
output
the ___ competition model is the most efficient type of market and is characterized by both productive and allocative efficiency
perfect
a market structure characterized by interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, produce is known as
perfect competition
firms that take or accept the market price and have no ability to influence that price are known as ___ takers
price
the demand for a perfectly competitive firm's product is a horizontal line originating at the market
price
price discrimination
pricing strategies for firms with monopoly power -the practice of charging more than one price for different units of a single product, when the price difference are not justified by differences in the cost of serving different costumers -charge when demand is inelastic. some people will pay any price for a product. -business people need the ticket a little time in advance and will pay a lot while vacationers will pay cheap far in advance. -leads to a higher profit
if an economy is going to produce the goods and services most wanted by society, competitive firms:
produce more of the products we value most and fewer of the products we value least
which of the following is not characteristic of perfect competitions? -large number of buyers and sellers -standardized products -east entry and exit -producers who are price makers
producers who are price makers
the 4 characteristics of a perfectly competitive market are:
producers who are price takers -a large number of buys and sellers -easy entry and exit -a standardized product
productive efficiency
producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service
allocative efficiency
producing the goods and services that are most wanted by consumers in such a way that their marginal benefits equals their marginal cost
___ efficiency is usiing the fewest resources possible to produce a good or service
productive
in the long run, perfectly competitive firms achieve ___ efficiency by producing at the lowest cost and ___ efficiency by producing what consumers want
productive, allocative
to calculate profit we need to identify 3 pieces of information
quantity of output, average total cost, price
average revenue
revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold
profit equals (average ___ minus average total ___) multiplied by output
revenue, cost
when Q rises and Mr>MC then profits will
rise expand increase output
if MC>AVC the AVC curve must be
rising
in a perfectly competitive market, the price of the firm should charge is the market price because the firm is a price
taker
marginal product
the additional output produced as a result of utilizing 1 or more unit of a variable resource
margnial revenue
the amount by which total revenue increases as a result of one unit increases in the quantity of output
average product is the: -total output produced as a result of utilizing one or more unit of fixed resource -additional output produced as a result of utilizing one or more unit of a fixed resource -amount of output produced per unit of a resource employed -amount of a resource employed per unit of output `
the amount of output produced per unit of a resource employed
pure economic profit
the amount remaining after both explicit and implicit costs are subtracted from total revenue -TR-Implicit-Explicit costs=EP -TR-Cost = EP -zero is not a bad thing
accounting profit
the amount remaining after explicit costs are subtracted from total revenue TR-Explicit cost = AP -0 is bad
average product
the average amount of output produced per unit of a resource employed; total produce divided by the number of units of a resource employed
marginal revenue (MR)
the change in a firms total revenue that results from a 1 unit change in output produced and sold
marginal product
the change in output associated with one unit change in the input -MP=ΔQ/ΔL -Q = quantity L= labor -note: the marginal product is measured by the slope of a tangent line to the production function at a particular level of input usage
marginal costs
the change in total costs associated with an increase in output of one unit -ΔTVC/ΔQ = ΔTC/ΔQ
what are 2 reasons for breaking average total cost into two components
the constantly decling average variable fixed cost is apparent -average variable cost is used to determine whether a firm should continue to operate or should shut down in the short run
consumer surplus
the difference between the max that a consumer would be willing to pay for a unit of a good and the amount that he or she actually pays
producer surplus
the difference between what producers receive for a unit of a good and the min they would be willing to accept
marginal cost
the extra or additional cost associated with the production of an additional unit of output
the marginal cost is the
the extra or additional cost associated with the production of an additional unit of output
marginal cost is the
the extra or addititonal cost associated with the production of an additional unit of output
marginal revenue curve for a perfect competition
the firm is a price taker
what is the relevant portion of the monopolist demand curve?
the first half is elastic while the second half is inelastic. you only want to produce the elastic side no there are not other subsititues. -Only operate on elastic side. -when price goes down total revenue goes up. when price goes up, total revenue goes down.
productive efficiency is
using the fewest resources possible to produce a good or service
costs that change with the amount of output produced are ___ costs
variable
is zero profit bad?
zero accounting profit means that you are bringing in just enough revenue to cover all the monetary payments you have to make. Once implicit costs are taken into account, then zero accounting profit means that the value of your economic profit is negative, which isnt good. -zero economic profit isnt bad. it means your revenures are covering not only all the monetary payments you have to make but also all of your implicit costs. it basically means your doing just as well as you would have at your next best optin