Unit 5
What is net gain?
MR-MC
total revenue
amount a firm receives for the sale of its output
variable input
an input whose quantity a firm can vary at any time
MR for a price taker is always... but MC is...
constant; usually increasing
variable costs
costs that do vary with quantity of output
when mr<mc
decrease q
If TR=TC / P=minATC
firm breaks even
If the market price is less than minimum ATC, what happens?
they will be unprofitable at any quality of output
How to calculate profit?
(P-ATC)Q
sherman anti-trust law
1890; reduced the market power of the large and powerful trusts of that time
clayton act
1914 strengthened the govts powers and authorized private lawsuits
In a perfectly competitive industry in equilibrium, what is equal acrid all firms?
MC because all firms produce Q of output when MC=MP
At or above the SD price, when is the short run supply curve?
MC curve
Short run market equilibrium
Qs=Qd
Long run market equilibrium?
Qs=Qd, no producer has an incentive to enter or exit industry
variable cost
a cost that depends on the quantity of output produced
fixed cost
a cost that doesn't depend on the quantity of output produced
sunk cost
a cost that has already been increased and is nonrecoverable, should be ignored in the decision about future actions
explicit cost
a cost that requires an outlay of money
fixed input
an input whose quantity is fixed for a period of time and cannot be varied
in perfectly competitive market,price equals what?
average revenue
efficient scale
bottom of the u-shape of ATC curve, minimizes ATC
marginal revenue
change in total revenue from an additional unit sold; change in tr/change in q
when do firms consider sunk costs? when do they not?
considers them when trying to exit, not when trying to shut down
fixed costs
costs that do not vary with the quantity of output produced
If the firm's price is always lower than min ATC, what should then do in the long run?
exit the industry
If TR<TC / P<minATC
firm incurs a loss
average cost
firms costs divided by quantity of output
when does a firm shut down?
if revenue it gets from producing is less than variable cost of production
when does a firm exit?
if revenue it would get from producing is less than is total cost curve
cost of production
includes all the opportunity costs of making its output of goods and services
marginal product
increase in output that arises from an additional unit of input
effects of price discrimination
increase profits, reduce DWL
when mr>mc
increase q
implicit costs
input costs that do not require an outlay of money by the firm
explicit costs
input costs that require a direct outlay of money by the firm
Why do we ignore fixed cost?
it is sunk
In the long run, if a firm is making profits, what will happen?
it will reach the break even price due to new producers entering the industry
economies of scale
long run atc falls as the quantity of output increases
diseconomies of scale
long run atc rises as quantity of output increases
constant returns to scale
long run atc stays the same as the quantity of output increases
exit
long run decision to leave the market
competitive market
many buyers and sellers, goods offered largely the same, firms can freely enter or exit
for competitive firms, price equals what?
marginal revenue
profit maximization happens at what point?
marginal revenue equals marginal cost
in order to have price discrimination, the firm must have some what?
market power because there are many firms all selling at market price
total cost
market value of the inputs a firm uses in production
long run supply curve
mc curve above the minimum point of its atc curve
implicit cost
measured by the value (in dollar terms) of the benefits that are forgone
What is the break-even price?
min ATC, where economic profit =0
What is the shut down price?
min AVC
What happens if demand shifts out?
more firms enter and equilibrium is reached again
Though the market curve always has a ________ slope, the individual curves' have a slope of ________
negative; 0
What type of profit does every industry in perfect competition have?
normal economic profit
barriers to entry sources
ownership of a key resource, copyrights etc, cost of production makes a single producer more efficient than a large # of producers
An individual price taker's demand curve is...
perfectly elastic
short run supply curve
portion of the mc curve that lies above avc
who gets the deadweight loss from a monopoly
private firm
When price is greater than min AVC but less than min ATC, what should they do?
produce in the short run
Optimal output rule
produce until MC=MR
inefficiency of monopoly
produces less than the socially efficient quantity of output
optimal output rule
profit is maximized by producing a quantity at which the marginal revenue of the last unit produced is equal to the marginal cost
diminishing marginal product
property whereby the marginal product of an input declines as the quantity of input increases
public ownership
rather than regulating a natural monopolu that is run privatley, the givt can run the monopoly itself
Industry supply curve
relationship between the price and total output of industry as a whole
price discrimination
selling the same good at different prices to different customers even though the production costs for both are the same
shutdown
short run decision not to produce anything during a specific period of time because of current market conditions
marginal revenue curve
shows how marginal revenue varies as output varies
marginal cost curve
shows how the cost of producing one more unit depends on the quantity that has already been produced
total product curve
shows how the quantity of output depends on the quantity of the variable input for a given quantity of fixed input
long-run average total cost curve (LRATC)
shows the relationship between output and average total cost when the fixed cost has been chosen to minimize the average total cost for each level of output
production function
shows the relationship between quantity of inputs used to make a good and quantity of output
A price taker's MR curve is...
straight at the market price
market supply
sum of the quantities supplied by the individual firms in the market
total cost curve
the curve that shows how total cost depends on the quantity of output
If TR>TC / P>minATC
the firm is profitable
marginal firm
the firm that would exit the market if the price were any lower
average fixed cost (AFC)
the fixed cost divided by the quantity of output, also known as the fixed cost per unit of output
marginal cost
the increase in total cost that arises from an extra unit of production; change in total cost divided by change in quantity
perfect price discrimination
the monopolist knows the willingness to pay of each individual customer and charges that
What happens as firms enter an industry?
the price decreases and then they exit, which increases profits and more enter, until equilibrium is reached
minimum cost output
the quantity of output at which the average total cost is lowest - corresponds to the bottom of the U-shaped average total cost curve
long run
the time period in which all inputs can be varied
short run
the time period in which at least one input is fixed
average total cost (average cost)
the total cost divided by the quantity of output produced; equal to the total cost per unit of output
average variable cost (AVC)
the variable cost divided by the quantity of output, also known as the variable cost per unit of output
When the market price exceeds min ATC, what happens?
they make a profit
total costs
total fixed cost + total variable costs
average revenue
total revenue divided by quantity sold
accounting profit
total revenue minus EXPLICIT costs
economic profit
total revenue minus total cost (including both explicit and implicit costs)
profit
tr-tc
natural monopoly
when a single firm can supply a good or service to an entire market at a smaller cost than could 2 or more firms
diminishing returns to an input
when an increase in the quantity of that input, holding the quantity of all other inputs fixed, decreases that input's marginal product
normal profit
when economic profit equals zero; the economic profit is just high enough to keep a firm engaged in its current activity
relationship between marginal cost and atc
when mc is less that atc, atc is falling, when mc is greater than atc, atc is rising
decreasing returns to scale
when output increases less than in proportion to an increase in all inputs
increasing returns to scale
when output increases more than in proportion to an increase in all inputs
when does a natural monopoly arise?
when there are economies of scale over the relevant range of output
Are perfect competition industries efficient?
yes, costs are minimized, no resources are wasted
