microecon chapter 12

efficient

Along the market demand curve D = MSB, consumers are efficient. Along the market supply curve S = MSC, producers are efficient.

supply curve

A competitive firm's ________ shows how the profit- maximizing quantity changes as the price of a good changes. So at all points along their supply curves, firms get the most value out of their resources.

price

A consumer's demand curve shows how the best budget allocation changes as the _________ of a good changes. So at all points along their demand curves, consumers get the most value out of their resources.

falls

as more firms begin to use the new technology, market supply increases and the price _________.

market equilibrium

At the _________, marginal social benefit equals marginal social cost. Resources are allocated efficiently. Total surplus is maximized.

profit-maximizing; value

Competitive firms produce the quantity that maximizes profit. We derive the​ firm's supply curve by finding the​ _________ quantity at each price. So firms get the most _______ out of their resources at all points along their supply curves.

value

Consumers allocate their budgets to get the most ________ possible out of them. We derive a​ consumer's demand curve by finding how the best budget allocation changes as the price of a good changes. So consumers get the most value out of their resources at all points along their demand curve.

NO. only long-term

Does temporary economic profit and temporary economic loss tigger entry and exit?

marginal social cost.

Efficient Use of Resources; This situation arises when marginal social benefit equals __________

marginal social cost curve

If the firms that produce the good bear all the costs of producing it, then the market supply curve is the __________.

marginal social benefit curve

If the people who consume the good are the only ones who benefit from the good, the market demand curve is the ___________.

cannot * any substitution away from this market would make the consumer worse off.

In a perfectly competitive market in​ long-run equilibrium, a consumer ________ become better off by making a substitution away from this market.

cannot; cannot

In a perfectly competitive market in​ long-run equilibrium, consumer surplus​ ______ be increased and producer surplus​ ______ be increased.

maximized

In long-run equilibrium total surplus is ___________

horizontal​ line

In​ long-run equilibrium in the perfectly competitive paper​ market, the quantity of paper supplied is​ 300,000 boxes a week and the equilibrium price is​ $10 a box. Following the permanent decrease in​ demand, the quantity of paper supplied is​ 200,000 boxes a week and the equilibrium price remains at​ $10 a box. When a market is in​ long-run equilibrium, firms make zero economic profit and price equals minimum average total cost. So the​ long-run average cost curve is a _________, and the paper market is a​ constant-cost industry.

Consumers

Long-run equilibrium; Each firm in the market has the plant that enables it to produce at the lowest possible average total cost. ________ are as well off as possible because the good cannot be produced at a lower cost and the price equals that least possible cost.

efficiently

Resources are used _________ when no one can be made better off without making someone else worse off.

price; price

Resources are used efficiently when marginal social benefit equals marginal social cost. Competitive equilibrium achieves this efficient outcome because for​ consumers, ______ equals marginal social benefit and for​ producers, _______ equals marginal social cost.

F

T/F; In the short​ run, all firms adopt the new technology.

increases

The Internet _______ the amount of competition because buyers can search for a seller on the Internet as well as locally.

as the market becomes more competitive it moves towards the competitive equilibrium. And at the competitive equilibrium price equals marginal social​ benefit, which equals marginal social cost.

The Internet increases market efficiency because ________

consumer surplus

The gain from trade for consumers is measured by _________.

producer surplus.

The gain from trade for producers is measured by ________

total surplus.

Total gains from trade equal ____________

economic profit (or loss),

Total revenue minus total cost is

efficient

When firms in perfect competition are away from​ long-run equilibrium, either *entry or exit* is taking place and the market is moving towards​ long-run equilibrium. But the market is still _______. As long as marginal social benefit​ (on the market demand​ curve) equals marginal social cost​ (on the market supply​ curve), the market is efficient.

price

When price EXCEEDS minimum average variable cost, the firm maximizes profit by producing the output at which marginal cost equals

1. break even 2. economic profit 3. economic loss

3 outcomes of producing the profit-maximizing output:

price taker *No single firm can influence the price—it must "take" the equilibrium market price.

A ________ is a firm that cannot influence the price of a good or service.

it produces a tiny proportion of the total output of a particular good and buyers are well informed about the prices of other firms

A firm in perfect competition is a price taker because​ _______.

below minimum AVC

A firm will stop producing an output in the short run when the market price of the good is​ _________.

shutdown point

A firm's _________ is the price and quantity at which it is indifferent between producing the profit-maximizing quantity and shutting down.

marginal revenue

A firm's __________ is the change in total revenue that results from a one-unit increase in the quantity sold.

price, P, multiplied by quantity sold, Q, or P Q.

A firm's total revenue equals

1. How to produce at minimum cost 2. What quantity to produce 3. Whether to enter or exit a market

A perfectly competitive firm's goal is to make maximum economic profit, given the constraints it faces. So the firm must decide:

marginal revenue curve (MR

Figure 12.1(c) shows the _______), which is the demand curve for the firm's product.

zero economic profit.

Firms enter as long as firms are making economic profits. In the long run, the market price falls until firms are making ____________

loss

Firms exit an industry in which they incur an economic _______.

zero economic profit.

Firms exit as long as firms are incurring economic losses. In the long run, the price continues to rise until firms make __________

economic profit decreases if output increases.

If MR < MC,

maximized

If MR = MC, economic profit decreases if output changes in either direction, so economic profit is _________.

economic profit increases if output increases. (even though the gap between marg. revenue and marg. cost is getting smaller with more output, the overall economic profit will be increasing - it's saying that ONE MORE UNIT of output can increase overall economic profit

If MR > MC,

whether to produce something or to shut down temporarily. *The decision will be the one that minimizes the firm's loss.

If the firm decides to stay in the market, it must decide

whether to exit the market or to stay in the market.

If the firm makes an economic loss, it must decide

TFC (fixed costs - e.g think about a Mexico hotel chain in the winter, even if it shuts down, it still has to pay rent!)

If the firm shuts down, Q is 0, BUT the firm still has to pay its ________.

it would increase production

If the market price is highered, how would a firm respond?

it would decrease production

If the market price were lowered, how would a firm respond?

shuts down

If the price goes too low (below the price equivalent of AVC) then the firm temporarily

less

If the price of a sweater is between $17 and $20.14, ... the firm produces the quantity at which marginal cost equals price. The firm covers all its variable cost and some of its fixed cost. It incurs a loss that is ___________ than TFC.

shown by a​ downward-sloping curve; perfectly elastic

In a perfectly competitive​ market, the market demand is​ _______ and the demand faced by the individual firm is​ _______.

perfectly elastic

In perfect competition, Each firm's output is a perfect substitute for the output of the other firms, so the demand for each firm's output is __________.

price taker

In perfect competition, each firm is a ___________.

enter or exit the market.

In short-run equilibrium, a firm might make an economic profit, break even, or incur an economic loss. In long-run equilibrium, firms only break even because firms can ___________

minimum ATC.

In​ long-run equilibrium, economic profit is zero and the market price equals

The firm'*s minimum efficient scale is small relative to market demand*, so there is room for many firms in the market. Each firm is perceived to produce a good or service that has *no unique characteristics*, so consumers don't care which firm's good they buy.

Perfect competition arises when

-Many firms sell identical products to many buyers. -There are no restrictions to entry into the industry. -Established firms have no advantages over new ones. -Sellers and buyers are well informed about prices.

Perfect competition is a market in which

fixed

The short run is a situation in which the number of firms is _______

AVC *here loss is equal to the fixed cost, as AVC is covered or has broken even with the price. Thus shutting down or continuing to produce results in the same amount of loss - so either decision has the same outcome in terms of economic proft notice on this graph how the AVC of 17$ is covered but the AFC of 3.14 is not covered and thus is a loss

The shutdown point occurs at the price and quantity at which ______ is at a minimum

normal profit

When firms in a competitive market are making an economic​ profit, new firms enter the​ market, which increases supply. The price falls in the long run until all the firms are making ________.

shutting down

When price is less than minimum average variable cost, the firm maximizes profit by temporarily

old-technology

With the lower price, _________ firms incur economic losses. Some exit the market; others switch to the new technology. Eventually all firms are using new technology. The market supply has increased and firms are making zero economic profit.

market demand and market supply

___________ determine the market price that the firm must take.

rarely

however a competitive market is______ in long-run equilibrium because it is constantly bombarded with constraint-changing events

breaks even

if price equals average total cost and the firm makes zero economic profit and thus it .

positive economic profit *note the area of the rectangle is the economic profit

if price exceeds average total cost, then the firm makes a

negative

if price is less than average total cost and the firm incurs an economic loss—economic profit is . note here the profit-maximizing output is technically a loss-minimizing output! The red rectangle shows the economic loss

price

recall: according to the law of supply, profit maximizing output varies as the market ________ varies (other things remaining the same_

minimum

recall: the MC curve intersects the AVC curve at its ______

other things remaining the same, the higher the market price of a good, the greater is the quantity supplied of that good

recall; what is the law of supply?

shutdown point *this is why the firm's supply curve runs along the marginal cost curve only from a quantity of the shutdown point or greater. Below that the supply remains zero (a straight line on the y-axis).

the firm never produces a quantity between zero and the quantity at the

marginal revenue, MR, equals marginal cost, MC

Because marginal revenue is constant (in a perfect competition) and marginal cost eventually increases as output increases (law of diminishing returns), profit is maximized by producing the output at which _______

producing a quantity where marginal cost is equal to marginal revenue (or Price set by the market!) - Thus although a firm may produce at the shutdown point - it's not ideal, Ideally a firm wants to produce at a point where overall revenue exceeds overall costs. It wants to make money!!

Although the shutdown point is where MC intersects the AVC curve - the goal is NOT to produce here! The goal is always to maximize profit by ______

increases; decreases

An increase in demand brings a rightward shift of the market demand curve: The price rises and the quantity (supplied) _______. A decrease in demand brings a leftward shift of the market demand curve: The price falls and the quantity (supplied) _________.

if average variable cost exceeds price, the loss exceeds total fixed cost and the firm shuts down!

Another way to word why a firm should shut down is...

diminishing returns

At high output levels, the firm again incurs an economic loss—now the firm faces steeply rising costs because of __________.

fixed costs

At low output levels, the firm incurs an economic loss—it can't cover its _________. At intermediate output levels, the firm makes an economic profit.

total fixed cost (TFC) - some of the TFC is covered because price exceeds AVC, yet does not exceed TC

At prices above minimum average variable cost but below average total cost, the firm produces the loss-minimizing output and incurs a loss, but a loss that is less than _______

market demand

At the horizontal of the short-run market supply curve, the number of firms continuing to produce is just enough to satisfy the

this is where, TR = TC, and where ZERO ECONOMIC PROFIT is made; this is called the *break-even point*

At the points on the TC & TR comparison graph where they intersect -what does this mean?

total fixed cost (TFC)

At the shutdown point, the firm incurs a loss equal to ___________.

supply is perfectly elastic here

At the shutdown point, there is a horizontal line (as some shut down and others don't), this horizontal line signifies that

horizontal

At the shutdown price ($17), some firms will produce the shutdown quantity (7 sweaters) and others will produce zero. At this price, the market supply curve is ________

total revenue

A​ firm's _______ is the price of its output multiplied by the number of units of output sold.

marginal cost curve above minimum average variable cost

A​ firm's supply curve is its​ ______.

market price

Each firm supplies the quantity at which marginal cost equals ________.

enter the market.

Economic profit induces some new-technology firms to ___________ The market supply increases and the price starts to fall.

decreases; down; more

Entry results in an increase in market output, but each firm's output _________. Because the price falls, each firm moves ____its supply curve and produces less - even though the market as a whole produces _______

increases; more; less

Exit results in a decrease in market output, but each firm's output ___________. Because the price rises, each firm moves up its supply curve and produces _______. Because the number of firms decreases, the market produces _______

*ATC* at the profit-maximizing output with the market price.

Maximum profit is not always a positive economic profit. To see if a firm is making a profit or incurring a loss compare the firm's

economic profit

New firms enter an industry in which existing firms make an ____________.

P​ > ATC.

New firms will enter the market when

total revenue and total cost curves

One way to find the profit-maximizing output is to look at the firm's _____________.

market supply and market demand

Short-run ________ determine the market price and output.

If not shutting down incurs further loss than just the loss from fixed costs, then it should shut down - this would happen if the variable cost of running the place (labour) is higher than the revenue taken in. To continue would be illogical - the firm is just losing even more money.

So when should the firm shut down?

F; In the long​ run, firms make zero economic profit and there is no incentive for new firms to enter the market or for existing firms to exit the market.

T/F; In the long​ run, firms make an economic profit.

temporary; permanent

Technological change brings only ________ gains to producers. But the lower prices and better products that technological advances bring are _______ gains for consumers

perfect substitute

The *demand* for a firm's product is *perfectly elastic* because one firm's sweater is a ________for the sweater of another firm.

substitute

The *market demand* is NOT perfectly elastic because a sweater is a _________ for some other good.

short-run market supply curve

The _________ shows the quantity supplied by all firms in the market at each price when each firm's plant and the number of firms remain the same.

marginal analysis

The firm can use __________ to determine the profit-maximizing output.

total fixed cost (TFC) plus total variable cost (TVC) minus total revenue (TR). Economic loss = (TFC + TVC) - TR or economic loss = (TFC) + [(AVC - P) x Q)] *PxQ = TR, and AVCxQ = TVC

The firm's loss equals

maximize economic profit

The goal of each firm is to _________, which equals total revenue minus total cost.

average variable​ cost; total fixed cost

The lowest price at which a firm will produce is the price at minimum​ ______ because at this price its loss equals​ ______.

MC​; the shutdown​ point; supply curves

The​ firm's supply curve is its​ _____ curve above​ _____. The market supply curve is the sum of the​ 1,000 firms'​ _____.

sum

To construct the market supply curve, we ______ the quantities supplied by all the firms at each price.

what price to charge

To maximize​ profit, a firm in perfect competition must decide all of the following except​ _______.

opportunity cost; normal profit

Total cost is the ________ of production, which includes ________.

x = quantity (demanded & supplied) y = PRICE

What are the axis on a market demand and supply graph?

x = labour y = output

What are the axis on a total product curve?

x = output y = costs

What are the axis on the TC curve alone?

x = output y = revenue

What are the axis on the TR curve alone?

Eventually, enough firms have entered for the supply and increased demand to be in balance and firms make zero economic profit. Firms no longer enter the market. Ultimately firms end up back in the same place, but the market has increased the number of firms and total output of the market has increased

What even later happens to firms vs markets when demand increases?

The firm incurs an *economic loss* and must now decide: if it should go out of business, shut down temporarily, or keep producing. If the loss is expected to be permanent, it will go out of business. To decided whether to temp shut down or keep running, the firm must compare the loss from producing vs the loss from shutting down - and pick the option that minimizes its loss

What happens if when MR = MC, the variable costs are covered but the fixed costs are not? (Price set by the market is less than average total cost and so profit-maximizing output is still not enough to cover total costs)

economic profit (or loss) = (P-ATC) x Q

What is the formula for economic profit in terms of market price and ATC per unit?

Economic profit induces some firms to enter the market, which increases the market supply and the price starts to fall. As the price falls, the quantity produced by all firms starts to decrease and each firm's economic profit starts to fall.

What later happens to firms vs markets when demand increases?

downward

When a new technology becomes available, the ATC and MC curves shift __________. Firms that use the new technology make economic profit.

long-run equilibrium

When entry and exit have stopped and economic loss and profit have been eliminated, a competitive market is in ___________

normal profit.

When firms in a competitive market are incurring an economic​ loss, some firms exit the​ market, which decreases supply. The price rises in the long run until all the firms are making _________

decreases; rises

exit ________ market supply. The market supply curve shifts leftward and the market price _________. The increase in market price decreases the economic loss of the remaining firms. Exit continues until the price again equals the​ firms' minimum average total cost.

A decrease in demand shifts the demand curve leftward. The price falls and the quantity decreases. Firms incur economic losses. Economic loss induces exit. The short-run market supply curve shifts leftward. As the market supply decreases, the price stops falling and starts to rise. With a rising price, each firm increases its output as it moves along up its marginal cost curve (supply curve). A new long-run equilibrium occurs when the price has risen to equal minimum ATC. Firms make zero economic profit, and firms have no incentive to exit the market. In the new equilibrium, a smaller number of firms produce the equilibrium quantity.

what happens to firms vs markets when demand decreases?

The market demand curve shifts rightward, the market price rises, and each firm increases the quantity it produces (travels up it's MC/supply curve). The market price is now above the firm's minimum average total cost, so firms make economic profit.

what initially happens to firms vs markets when demand increases?

a firm's *profit-maximizing output*

what is the quantity supplied at the market price called?

economic profit.

when a new technology becomes available that lowers production costs, the first firms to use it make _________