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
