microecon exam 3
Allocative Efficiency
resources allocated to their highest possible use (demand=MC)
What is the relationship between a monopolist's demand curve and the market demand curve?
A monopolist's demand curve is the same as the market demand curve.
What is the relationship between a monopolist's demand curve and its marginal revenue curve?
A monopolist's marginal revenue curve has twice the slope of its demand curve, because to sell more output, a monopoly must lower price.
When are firms likely to enter an industry? When are they likely to exit?
Economic profits attract firms to enter an industry, and economic losses cause firms to exit an industry.
productive efficiency vs allocated efficiency
Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.
What is the shape of ATC, AVC, MC
U-shaped
Nash Equilibrium
a situation in which economic actors interacting with one another each choose their dominant strategy and stay with it
dominant strategy
a strategy that is the best for a firm, no matter what strategies other firms use
Marginal Cost (MC)
change in total cost / change in total output
Marginal Revenue (MR)
change in total revenue / change in quantity
Suppose that a perfectly competitive industry becomes a monopoly.
consumer surplus-decreases, producer surplus- increases deadweight loss- incrasese
total cost
cost of all inputs a firm uses
fixed costs
costs that remain constant as output changes
variable costs
costs that vary with the quantity of output produced
natural monopoly
develops automatically due to economics of scale
in a competitive market, P=MR=AR because?
firms can sell as much output as they want at market price
cooperative equilibrium
firms cooperate to increase their mutual payoff
total cost(TC)
fixed costs + variable costs
Causes of Monopoly
government action, control of key resource, network externalities, natural monopoly
the market supply curve is derived from?
horizontally adding the individual firms' supply curves
The four main reasons a firm becomes a monopoly are?
the government blocks entry, control of a key resource, network externalities, and economies of scale.
When maximizing profits, MR = MC is equivalent to P = MC because?
the marginal revenue for a perfectly competitive firm is the same as its demand curve
four-firm concentration ratio
the percentage of total industry sales accounted for by the top four firms in the industry
Technology
the processes a firm uses to turn inputs into outputs
Long run
the time period in which all inputs can be varied
why are firms willing to accept losses in short run but not in the long run?
there are sunk cost in the short run but not in the long
Average Total Cost (ATC)
total cost / output
Profit
total revenue - total cost
Production Theory
universal rules for firms to operate by
Average Variable Cost (AVC)
variable cost / output
price efficiency
when a good or service is produced at the lowest possible cost
a monopolist is a price taker because?
when a monopolists raises its prices, it loses some but not all customers
monopolistic competition
a market structure in which many companies sell products that are similar but not identical
monopoly
a market structure with only one seller of a unique product
Average Fixed Costs (AFC)
Fixed costs / output
profit max
MC=MR
Total Revenue (TR)
Price x Quantity
Average Revenue (AR)
TR / Q
Monopoly
a firm that is the only seller of a good or service that does not have a close substitute
A price taker is?
a firm that is unable to affect the market price
What is the relationship between a perfectly competitive firm's marginal cost curve and its supply curve?
a firms marginal cost curve is equal to its supply curve for prices above average variable cost
perfect competition
a market structure in which a large number of firms all produce the same product
oligpolistic competition
a market structure in which few companies produce identical or different products
economic profit formula
accounting profit - opportunity costs(salary+bonds x %)
Capital
any physical item that helps produce something
labor
any sort of worker (human)
In the short run, a firm's shutdown point is the minimum point on the
average variable cost curve, while in long run, a firms exit point is the minimum point on the average total cost
Why are consumers so powerful in a market system?
because it is consumers demand that influences the market price and dictates what producers will supply
Perfect competition leads to allocative and productive efficiency
because prices reflect consumer preferences/ because firms are motivated by profit.
Economists could find that a firm is a monopoly if
it earns profits in the long run.
economists believe that the model of perfect competition is important because?
it is a benchmark-a market with maximum possible competition- that economists use it to evaluate actual markets that are not perfectly competitive
a firm is likely to be a price taker when?
it represents a small fraction of the total market
For a market to be perfectly competitive, there must be?
many buyers and sellers, with firms selling identical products, and no barriers to entry
technological change
method used to turn less inputs into the same amount of outputs, or more outputs from the same input
Short run
period of time, where where one of the firms inputs are fixed
Production Efficiency
producing something at the lowest possible cost (MC=ATC)
in long-run competitive equilibrium, a firm earning zero economic profit
will continue to produce because such profit corresponds with positive accounting profit