Global Economics for Managers - Chapter 13-17 Review

Variable costs in the short-run

Wages, transportation costs, raw material costs, manufactured inputs. Costs that increase as more output is created

Duopoly

an oligopoly consisting of only two firms

If marginal costs equal average total costs

average total costs are minimized

A firm whose average total cost continually declines at least to the quantity that could supply the entire market is known as a

natural monopoly

As the number of sellers in an oligopoly becomes very large

The quantity of output approaches the socially efficient quantity

Can an monopolistically competitive firm earn profit in the long run or the short run?

The short run only!

In the short run, what is total cost?

The sum of both fixed and variable costs.

What does the total cost curve look like?

The total cost curve goes up with quantity per output.

What is the policy makers response to the prisoners dilemma?

They encourage firms to compete instead of cooperate Anti-trust laws Penalties Moral Appeals

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

Total Cost

Profit

Total Revenue - Total Cost

How does a firm in perfect competition decide to shut down in the long run?

Total Revenue < Total Cost Price < Average Total Cost MR = MC Maximized Profit

How does a firm in perfect competition shut down in the short-run?

Total Revenue is < Total Variable Costs Price < Avg Variable Costs

Total Cost (TC)

Total fixed cost (TFC) + Total Variable Cost

What is a price taker?

A company that has to accept the price that the market sets for a good. They have no influence over setting the price.

Opportunity Cost

All of the things that must be forgone to acquire that item.

Marginal Cost

Change in total cost / Change in quantity

Total Cost

Comprises variable costs when we refer to the long run, since there are no fixed costs.

Fixed Costs

Costs that do not change when you change production - rent, electricity, salaries for workers

When a monopolist increases the amount of input that it produces and sells, average revenue

Decreases and marginal revenue increases

If government regulation sets the maximum price for a natural monopoly equal to its marginal cost, then the natural monopolist will....

Earn economic losses

In the long run, if a very small factory were to expand its scale of operations, it is likely that it would initially experience

Economies of scale

monopolist's profits with price discrimination will be

Higher than if the firm charged just one price because the firm will capture more consumer surplus

What are the characteristics of monopolistic competition

Hybrid of perfect competition and monopoly Market described as imperfect competition Many sellers Product differentiation Free entry/exit into market

marginal cost

Increase in total cost per additional unit of good produced.

How do perfect competition and monopoly differ?

Influence of Price/Quantity? Perfect Competition: Price Taker Monopoly: Price maker Size of firm to market? Perfect Competition: Small Monopoly: 100% of the market Demand Curve Shape? Perfect competition: Horizonal Monopoly: Downward sloping Market Decisions: Perfect Competition: Only Quantity Monopoly: Quantity and Price

How are perfect competition and monopolies the same?

Maximize profits, Marginal Revenue = Marginal Cost, both can earn economic profits in the long run

Are there fixed costs in the long-run?

No, only cost that matters is the average cost (TC/output)

In perfect competition, is the demand curve perfectly elastic or inelastic?

Perfectly elastic -

In a Duopoly

Price is determined by market demand i.e. the prisoners dilemma - if one firm increases production (Q), this will impact the price for the whole market. We vs. Me.

What does the curve on a production function graph do?

Production increases at a decreasing rate, so the line flattens at the top with quantity of output and the number of workers hired.

Total Revenue

Quantity of output the firm produces multiplied by the price at which it sells its output.

Oligopoly Characteristics

Small group of sellers Offer similar or identical products Tension between cooperation and self interest Game theory

What characterizes a monopoly?

Sole seller of a product or service No close substitutes Price maker Barriers to entry: Examples: Diamond mines (limited supply), Drug Patents (government regulations), The production process: natural monopolies.

What is the conclusion we can make from the prisoner's dilemma?

That many people will choose their own self interests vs. the collective good of the group. Illustrates why cooperation is difficult to maintain even when it is mutually beneficial.

Short-run

That period of time when at least one input is fixed and cannot be changed.

explicit costs

The actual payments a firm makes to its factors of production and other suppliers.

How do firms in perfect competition

The gap between total revenue and total cost, or at the point where marginal revenue equals marginal cost (this is how much of the product they should make to maximize profit).

Marginal product of labor

The increase in output that results from employing one additional unit of labor

Economies of scale

When long-run average total cost declines as output increases.

Diseconomies of scale

When long-run average total cost rises as output increases

Monopolistic Graph: The efficient price and quantity are represented by point

Where marginal cost crosses demand curve (downslope)

Are there fixed costs in the short run?

Yes!

If, as the quantity produced increases, a production function first exhibits increasing marginal product and later diminishing marginal product, the corresponding marginal-cost curve will

be U-shaped

When a firm has a natural monopoly, the firm's average total cost is

downward sloping

In the long run a company that produces and sells popcorn incurs total costs of $1,050 when output is 90 canisters and $1,200 when output is 120 canisters. The popcorn company exhibits

economies of scale because average total cost is falling as output rises

Accounting profit is equal to total revenue minus

explicit costs

economies of scale

factors that cause a producer's average cost per unit to fall as output rises

average fixed cost

fixed cost divided by the quantity of output produced

If marginal revenue exceeds marginal cost, a monopolist should

increase output. WHY?? Because when MR > MC for a monopolist, that means they can produce extra goods and continue to make a profit.

Public ownership of natural monopolies

tends to be inefficient

implicit costs

input costs that do not require an outlay of money by the firm

Explicit costs

input costs that require an outlay of money by the firm

Average total cost is increasing whenever

marginal cost is greater than average total cost

When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost

the firm may be incurring economic losses

concentration ratio

the percentage of the market's total output supplied by its four largest firms

Diminishing Marginal Product

the property whereby the marginal product of an input declines as the quantity of the input increases

Production function

the relationship between the quantity of inputs used to make a good and the quantity of output of that good

Economic profit is equal to total revenue minus

the sum of implicit and explicit costs

A natural Monopoly occurs when

there are economies of scale over the relevant range of output

Average total cost equation

total cost/quantity

Use the following information to answer question. Madelyn owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for $100 each. It costs Madelyn $20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested $100,000 in her factory and equipment: $50,000 from her savings and $50,000 borrowed at 10 percent (assume that she could have loaned her money out at 10 percent, too). Madelyn can work at a competing pottery factory for $40,000 per year. The accounting profit at Madelyn's pottery factory is...

$75,000 Explicit Costs: $ 20,000 for materials $ 50,000 x .10 = $5,000 100,000-25,000 = $75,000

Why do monopolistic competitive firms need to market their products or services?

Because they need to advertise in order to let consumers know about their product and why they should buy it. There is so much competition they need to stand out in the crowd and gain recognition.

In monopolistic competition, where does the MR curve lie below on the graph?

Below the demand curve. Price is always going to more than Marginal Revenue.

tying agreement

Buyer is required to purchase one product in order to get another product

Ms. Joplin sells colored pencils. The colored-pencil industry is competitive. Ms. Joplin hires a business consultant to analyze her company's financial records. The consultant recommends that Ms. Joplin increase her production. The consultant must have concluded that , at her current level of production, Ms. Joplin's

Marginal revenues exceed her marginal cost If the marginal revenue exceeds the marginal cost, then the firm can increase profit by producing one more unit of output.

Perfect competition or a "competitive market"

Market with many buyers and sellers (consumers and firms). Homogeneous products - the same Buyers and sellers are price takers Easily enter and exit market

Long-run

The period of time when all inputs and therefore cost can vary.

Monopolistic competition

a market structure in which many companies sell products that are similar but not identical.

The efficient scale of production is the quantity of output that minimizes

average total cost

When marginal costs are below average total costs

average total costs are falling

When a monopolist produces an additional unit, the marginal revenue generated by that unit must be

below the price because the price effect outweighs the output effect.

What is the equation for marginal cost?

change in total cost / change in quantity

Average marginal cost

cost of each additional unit of output

Variable Costs

costs that vary with the quantity of output produced

product-variety externality

surplus consumers get from the introduction of new products

opportunity cost

whatever must be given up to obtain some item