Micro Final
increasing cost industry
LRSC is upward sloping the prices of some of all inputs increase as the industry expands and the demand for input grows diseconomies of scale for one or more inputs
low elasticity of supply
MC increases rapidly due to increase in output
high elasticity of supply
MC increases slowly in response to increase in output
perfectly elastic supply
MC is constant
if VC=bq
MC is constant and equal to b
Cost Output Elasticity, Ec
MC/AC Ec<1= economies of scale Ec>1= diseconomies of scale
ATC is minimized where
MC=ATC
MRTS of 3 means
MPL is 3 times MPK
MRTS=
MPL/MPK derivative w respect to L over derivative w respect to k
expressions for cost minimizing combinations of inputs
MPL/w=MPK/r MRTS=w/r MPL/MPK=w/r
licensing tax will have no effect on a firms
MR or MC
along the perfectly competitive demand curve:
MR=AR=P
to find profit maximizing output for monopoly
MR=MC
rule of thumb for pricing monopoly
MR=P + P(1/Ed) or P= MC/1+(1/Ed)
in the short run if a perfectly competitive firm has not shut down...
it is operating on the upward-sloping portion of its AVC curve
the demand curve facing a perfectly competitive firm is the same as
its AR and MR curves
if a competitive firm's MC curve is U-shaped...
its short-run supply curve is the upward sloping portion of the MC curve that lies above the short run AVC curve
producer surplus with high cost firms
less PS
a firms MC curve does not depend on
level of fixed costs
VC=23+Q+7Q^2 implies an MC curve that is
linear
if cost of producing each unit falls, market price will also fall in the
long-run
a tax imposed on monopoly increases
marginal cost by the amount of the tax (and total cost)
if MC is rising and AVC is falling as output increases...
marginal cost is below AVC
a firm maximizes profit by operating at the level of output where
marginal revenue equals marginal cost
for a competitive firm, market price is determined by
marker demand and supply curves -the amount of output for an individual firm has no effect
average revenue= the monopolist
market demand curve
for monopolist if MC=0...
maximizing profit is equivalent to maximizing revenue, when Ed=-1
for economies and diseconomies of scale on graph:
minimum points of SRAC curves do not lie on LRAC curves
producer surplus with lower cost firms
more PS
whenever a firm's ATC costs are rising as output rises, AVC...
must be rising too
effect of excise tax on monopolist
new optimal production where MR=MC+t change in price can be larger than tax
why does monopolist market have no supply curve
no one-to-one relationship between price and quantity
a firm never operates
on the downward sloping portion of its AVC curve
In the short run, a perfectly competitive firm earning positive economic profit is
on the upward-sloping portion of its ATC
the demand curve facing a perfectly competitive firm is
perfectly horizontal
for a monopolist, if MR=MC=AR, economic profit must be
positive
for a monopolist, at every output level, AR is equal to
price
for monopolist, shifts in demand can change
price and/or output
effect of output tax on the industry
raises market price and decreases total output
to find output that maximizes consumer surplus and producer surplus for monopoly
set inverse demand function=MC
how to find equilibrium output rate and price
set market demand to market supply
increase in demand for a good raises the market price in the...
short-run
isocost line
shows all of the input combinations that yield the same cost
only way a firm can eliminate its fixed costs
shutting down
negative economic profit
signals you are earning less than the normal rate of return (below average), and you are not covering your opportunity cost. -firm should consider going out of business
decreasing returns to scale
situation in which output less than doubles when all inputs are doubled
increasing returns to scale
situation in which output more than doubles when all inputs are doubled
market supply curve
sum of each firms individual supply curves
if the market price for a competitive firm's output doubles, then
the MR doubles
if the perfectly competitive firm is earning negative economic profit it is operating on...
the downward sloping portion of the ATC curve
VC=52+2Q+3Q^2 implies an MC curve that is
upward sloping
if capital and labor are perfect substitutes but labor is cheaper,
use only labor in production process
consumer surplus=
variable cost?
MC=
w/MPL
constant returns to scale
when long-run average total cost is constant as output increases
If the firm's current output is two unites less than the profit-maximizing output, then the next unit produced
will increase revenue more than it increases cost
for monopoly you should always raise price if
you face inelastic demand
in competitive markets in the long run economic profit is
zero no incentive to enter or exit
when input costs are increased...
-MC increases -lower output -lower profit
Long-run average cost curve
-U-shaped because of increasing and decreasing returns to scale
a price taker is
-a perfectly competitive firm -a firm that cannot influence the market price
to find expansion path:
-find MRTS -set equal to w/r -isolate and solve for K
for competitive firms when there is an increase in market price
-firms increase quantities produced -increases firms total profit and makes additional production profitable
to use expansion path and budget to find K and L:
-set budget equal to cost function -plug in expansion path for K -solve for L -substitute to solve for K -plug in L and K into production function to find Q
to find MR for monopoly
-take inverse demand function -same intercept double the slope
decreasing cost industry
LRSC is downward sloping industry takes advantage of its size to obtain inputs for cheaper
every linear supply curve from origin has a price elasticity=
1
3 conditions for long-run competitive equillibrium
1. all firms in the industry are maximizing profit 2. zero economic profit, no incentive for entry or exit 3. price of product is such that Q supplied= Q demanded
three assumptions of perfectly competitive markets
1. price takers 2. product homogeneity 3. free entry and exit
why do short-run supply curves for perfectly competitive firms tend to be upward sloping
1. there is diminishing marginal product for one or more variables 2. marginal costs increase as output increases
zero economic profit
A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.
when APL>MPL
APL is decreasing
when APL<MPL
APL is increasing
when MC is below ATC,
ATC is falling
ATC is always greater than
AVC
when MC is constant...
AVC is also constant and =MC
when MC is above AVC,
AVC is rising
market supply curve begins at
AVC of lowest cost firm
Is LRAC is constant,
LRAC=LRMC
isocost equation
C = wL + rK
opportunity cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
constant cost industry
LRSC is a horizontal line at a price that is equal to the long run minimum average cost of production
positive economic profit
Earning more than the normal rate of return and beating your opportunity cost encourages entry and supply curve shifts right
when demand is extremely elastic for monopoly
Ed is a large negative number, price will be very close to MC -little benefit to being a monopolist
AFC=
FC/Q
short-run expansion path is
Horizontal line showing the cost-minimizing input combinations for various output levels when capital is fixed in the short run. -only L can be changes
markup for monopoly=
P-MC
competitive firm should shut down when
P<AVC
to maximize profit in long run produce where
P=LRMC
profit maximization condition for perfectly competitive firm:
P=MC MR=MC
2 ways to find producer surplus
PS=R-VC PS=profit+FC
profit=
R-TC P(Q)-TC
producer surplus=
R-VC
ATC=
TC/Q
short-run average cost curve
U-shaped because diminishing returns to a factor of production
sunk cost
a cost that has already been committed and cannot be recovered -should not influence current decisions -if it has no alternative use, opportunity cost is zero
expansion path
a curve that shows a firm's cost-minimizing combination of inputs for every level of output
economies of scale
a doubling of output requires less than a doubling of cost
diseconomies of scale
a doubling of output requires more than a doubling of cost
accounting cost
actual expenses plus depreciation charges for capital equipment explicit costs of production
economic rent
amount that firms are willing to pay for an input less the minimum amount necessary to obtain it -opportunity cost to owning any factor of production whose supply is limited
in a constant cost industry, and increase in demand in the long run will be followed by
an increase in supply that will bring price down to the level it was before the demand shift
LRMC intersects LRAC...
at its minimum
firms often use patent rights as a
barrier to entry
as price of labor increases, isocost curve
becomes steeper
The MC curve goes through the minimum of
both the AVC and ATC curve
as output increases the difference between a firm's ATC and AVC
cannot rise
if price is between AVC and ATC...
continue operating, but plan to go out of business
Distance between ATC and AVC curves
decrease as output increases
how does license cost effect monopoly
decreases profit
as LMC and LAC get further apart
decreasing returns to scale
MC=
derivative of TC function
producer surplus graphically
difference between MC and price
convex isoquant
diminishing MRTS
an improvement in technology would result in
downward shifts of MC and increases in output.
in long-run competitive equilibrium, a firm that owns factors of production will have
economic profit=0 accounting profit>0
LAC>LMC
economies of scale
an output tax that does not effect market price...
encourages firm to reduce output MC increases by the amount of the tax
The LRAC curve is the ____ of the SRAC curves
envelope
perfectly inelastic supply
equipment is fully utilized, can only have greater output if more plants are built
to maximize profit for monopoly:
find point where MC=MR and go up to that point on the demand/AR curve
for monopolist if at current level of output price elasticity=-0.15
firm should cut output
if monopolist is producing where MR>MC,
firm's output is smaller than the profit maximizing quantity
if ATC is a straight line and MC is positive constant...
fixed costs must be zero
producer surplus= economic profit when
fixed costs=0
as LMC and LAC get closer
increasing returns to scale
for monopolists at output level P=MC
the monopolist is not maximizing profit and should decrease output
Competitive firm's supply curve
the portion of the MC curve for which MC>AVC
constant returns to scale
the situation in which a firm's long-run average costs remain unchanged as it increases output
marginal revenue graphically is
the slope of the total revenue curve at a given point
economic cost
the value of all resources used to produce a good or service; opportunity cost
at every output level, a firm's SRAC equals or exceeds its LRAC because
there are at least as many possibilities for substitution between factors of production in the long run as the short run
when a monopolist is on inelastic portion of demand curve...
they could make a greater profit by producing less and selling at a higher price
what would happen in the short run, keeping capital fixed, to the input mix if output increased
this would have to be accomplished with more labor the level of production in the short run would be more expensive than in the long run in the long run, both labor and capital could be adjusted to find a more efficient input combo
sunk costs should not impact
todays decisions