Micro Econ
short run
a period of time sufficiently short that at least some of the firms factors of production are fixed
constant returns to scale
a production process is said to have constant returns to scale if, when all inputs are changed by a given proportion, output changes by the same proportion
increasing returns to scale
a production process is said to have increasing returns to scale if, when all outputs are changed by given proportion, output changes by more than that proportion
natural monopoly
a single firm can produce the entire market Q at lower cost than could several other firms
perfect hurdle
a threshold that completely segregates buyers whose reservation prices lie above it from other reservation prices lie below it, imposing no cost on those who jump the hurdle
To produce 150 units of output, the firm must use 3 employee-hours. To produce 300 units of output, the firm must use 8 employee-hours. Apparently, the firm is:
experiencing diminishing marginal returns.
monopoly example
gas station in a small town
One reason that variable factors of production tend to show diminishing returns in the short run is that:
there are more and more workers using a fixed amount of productive resources.
diminishing marginal returns means that...
to increase output at a constant rate, the firm must at larger and larger quantities of variable inputs
True or False: n a perfectly competitive industry, the industry demand curve is horizontal, whereas for a monopoly it is downward-sloping.
False
Which of the following firms is most likely to be a monopolist?
One grocery store in a small town
average total cost (ATC)
TC/Q
pure monopoly
The only supplier of a unique product with no close substitutes
What is the socially desirable price for a natural monopoly to charge?
The price at which the marginal benefit to the consumer equals the marginal cost of production.
Why do price discrimination and the existence of slightly different variants of the same product tend to go hand in hand?
To charge different prices to different customers for essentially similar products with similar costs of production, the seller must separate customers according to their reservation prices. This hurdle often involves a minor difference in quality or some other product characteristic.
True or False: For a natural monopoly, average cost declines as the number of units produced increases over the relevant output range.
True
True or False:Perfectly competitive firms have no control over the price they charge for their product.
True
average variable cost (AVC)
VC/Q
perfectly discriminating monopolist
a firm that charges each buyer exactly his or her reservation price
imperfectly competitive firms
a firm that has at least some control over the market price of its product
price taker
a firm that has no influence over the price at which it sells its product
profit-maximizing firm
a firm whose primary goal is to maximize the difference between its total revenues and total costs
profitable firm
a firm whose total revenue exceeds its total cost
market power
a firms ability to raise the price of a good without losing all its sales
perfectly competitive market
a market in which no individual supplier has significant influence on the market price of the product
cost-plus regulation
a method of regulation under which the regulated firm is permitted to charge prices that cover the opportunity cost of resources provided by the firm's owners
long run
after a period of time all the firms factors of production are variable
perfect competition example
agriculture
monopolistic competition
an industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another
oligopoly
an industry structure in which a small number of large firms produce products that are either close of perfect substitutes
factor of production
an input used in the production of a good or service
variable factor of production
an input whose quantity can be altered in the short run
fixed factor of production
an input whose quantity cannot be altered in the short run
a profit maximizing firm in the short run will expand output...
as long as marginal revenue is greater than marginal cost
marginal cost
as output changes from one level, to another, the change in total cost divided by the corresponding change in output
oligopoly example
car manufactorers
monopolistic example
clothing stores
Suppose a firm is collecting $1,250 in total revenues and the total costs of its variable factors of production are $1,000 at its current level of output. The firm has $500 in fixed costs. In the short run, one can predict that the firm will ____ and in the long run the firm will _____.
continue to operate; exit the industry
marginal product of labor
increase in output resulting from employing one more unit of labor
fixed cost are those cost which are...
independent of the rate of output
if a firm is a price taker, the the demand curve for the product is...
perfectly inelastic (horizontal line)
when do you shut down
price is less than AVC (so you produce zero)
the deadweight loss associated with a monopoly occurs because the monopolist...
produces an output level less than the socially optimal level
what is not true about pure competition
product differentiation
a monopoly can...
set the price it charges for its output but faces a downward sloping demand curve so it cannot earn unlimited profits
explicit costs
the actual payments a firm makes to its factors of production and other suppliers
producer surplus
the amount by which price exceeds the sellers reservation price
marginal revenue
the change is a firms total revenue that results from a one-unit change in output
If a monopolist could perfectly price-discriminate
the marginal revenue curve and the demand curve would coincide
implicit costs
the opportunity costs of the resources supplies by the firm's owners
hurdle method of price discrimination
the practice by which a seller offers a discount to all buyers who overcome some obstacle
price discrimination
the practice of charging different buyers different prices for essentially the same good and service
total cost
the sum of all payments made to the firms fixed and variable factors of production
fixed cost
the sum of all payments made to the firms fixed factors of production
variable cost
the sum of all payments to the firms variable factors of production
profit
the total revenue a firm receives from the sale of its product minus all cost (both explicit and implicit)
law of diminishing returns
when some factors of production are fixed, increased production of the good eventually requires even larger increases in the variable factor
socially optimal level
where MC equals Demand
what is a monopolies profit maximizing output level
where marginal revenue equals marginal cost
