MICROECONOMICS

economies of scale

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

a u-shaped average total cost curve...

falls at low levels of output and then rises at higher levels.

TR > TC

firm is profitable

total cost

fixed costs plus variable costs

total cost curve...

gets steeper as it goes from right to left

whenever a firm is a price-taker, its marginal revenue curve is a

horizontal line at the market price: it can sell as much as it likes at the market price

variable output

is an input whose quantity the firm can vary at any time.

total production curve shape...

is going up but flattening

an industry can be perfectly competitive if...

it must contain many firms, none of whom have a large market share. if consumers regard the products of all firms as equivalent.

In general, a firms profit equals:

its total revenue- total cost

at high output levels, high fixed cost yields

lower average total cost (adding the new machinery initially is non-benefical; in the long run it lowers ATC)

in monopolistic competition,

many firms each sell a differentiated product

In perfect competition,

many firms each sell an identical product.

as output increases...

marginal cost also increases because the marginal product of the variable input decreases.

And at output greater than the minimum-cost output,

marginal cost is greater than average total cost and average total cost is rising.

concentration ratios

measure the percentage of industry sales accounted for by the "X" largest firms, for example the four-firm concentration ratio or the eight-firm concentration ratio.

average fixed costs fall as...

more output is produced because the numerator (the fixed cost) is a fixed number but the denominator (the quantity of output) increases as more is produced

Herfindahl - Hirschman Index,

or HHI, is the square of each firm's share of market sales summed over the industry. It gives a picture of the industry market structure

Diminishing returns, however, usually grow increasingly important as

output rises (when output is large, the diminishing returns effect dominates the spreading effect, causing the average total cost curve to slope upward.)

principle or marginal analysis

proceed until marginal benefit equals marginal cost.

optimal output rule

profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

price-taking firms ultimate output rule

says that a price-taking firm's profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

total product curve

shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed input

Economies of scale often arise from

the increased specialization that larger output levels allow -a very large initial setup cost -network externalities

the spreading effect

the larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower the average fixed cost.

system of market structure is based on two dimensions:

the number of firms in the market (one, few, or many) whether the goods offered are identical or differentiated

implicit cost of capital

the opportunity cost of the capital used by a business; that is, the income that could have been realized had the capital been used in the next best alternative way.

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

At the bottom of the U-shaped average total cost curve,

the two effects exactly balance each other. At this point average total cost is at its minimum level, the minimum average total cost.

At low levels of output, the spreading effect is

very powerful because even small increases in output cause large reductions in average fixed cost (dominates the diminishing returns effect)

This initial downward slope occurs because a firm often finds that,

when it starts with only a very small number of workers, employing more workers and expanding output allows its workers to specialize in various tasks. (salsa)

free entry and exit

when new producers can easily enter into an industry and existing producers can easily leave that industry

oligopoly

(economics) a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors

barrier to entry

Any factor that makes it difficult for a new firm to enter a market

TC=

FC+VC

AFC=

FC/Q

marginal revenue curve is...

STRAIGHT

the diminishing returns effect

The larger the output the greater the amount of variable input required to produce additional units leading to higher average variable cost

production function shows

The relationship between inputs and output

production function

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

implicit cost

The value of something sacrificed when no direct payment is made

In oligopoly

a few firms—more than one but not a large number— sell products that may be either identical or differentiated

what produces goods or services for sale?

a firm

economists believe that marginal cost curves often slope downward as

a firm increases its production from zero up to some low level, sloping upward only at higher levels of production: (check mark or j shaped)

3 conditions of monopolistic competition

a large number of competing firms, differentiated products, and free entry into and exit from the industry in the long run.

perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

fixed input

an input whose quantity is fixed for a period of time and cannot be varied

Differentiated goods

are goods that are different but considered at least somewhat substitutable by consumers (think Coke versus Pepsi).

average fixed cost

Fixed cost divided by the quantity of output

What determines the shape of the long-run average total cost curve?

It is the influence of scale, the size of a firm's operations, on its long-run average total cost of production

in the short run a firm will maximize profit by producing the quantity of output at which

MC=R

net-gain

MR-MC

Profit=

P-ATC

AVC=

VC/Q

imperfect competition

When no one firm has a monopoly, but producers nonetheless realize that they can affect market prices, an industry

price-taking consumer

a consumer whose actions have no effect on the market price of the good or service he or she buys

sunk cost

a cost that has already been committed and cannot be recovered (remember cost of break pads)

variable cost

a cost that rises or falls depending on how much is produced

monopolist

a firm that is the only producer of a good that has no close substitutes

In monopoly,

a single firm sells a single, undifferentiated product.

For a U-shaped average total cost curve,

average total cost is at its minimum level at the bottom of the U

At the minimum-cost output,

average total cost is equal to marginal cost.

ATC=MC

break even

marginal product of labor=

change in quantity of output/quantity of labor

marginal revenue=

change in total revenue/change in quantity of output

Firms that experience scale effects in production find that their long-run average total cost

changes substantially depending on the quantity of output they produce.

four types of barrier to entry:

control of a scarce resource or input, economies of scale, technological superiority, and government-created barriers.

diseconomies of sale typically arise...

due to problems of coordination and communication

normal profit

economic profit of zero

monopoly

(economics) a market in which there are many buyers but only one seller

market share

A company's product sales as a percentage of total sales for that industry

when competition is perfect...

every firm is a price taker

natural monopoly

exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.

P=ATC

firm breaks even

marginal cost curve is plotted..

halfway between one and two, and so on

marginal production

has diminishing roots, goes down! straight

At output less than the minimum-cost output,

marginal cost is less than average total cost and average total cost is falling.

MR=MC at

monopolist's profit-maximizing quantity of output

when someone earns negative economic profit it means:

one should devote resources to next best alternative

marginal cost curve is

swoop shaped

marginal cost is

the added cost of doing something one more time

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

marginal cost is;

the difference between the total costs of selected quanties (you divide by the difference in quantities)

An economic profit of zero means that

the firm could not do any better using its resources in any alternative activity.

average total cost

total cost divided by the quantity of output

economic profit

total revenue minus total cost, including both explicit and implicit costs

accounting profit

total revenue minus total explicit cost. -reported on income tax reports

all inputs are____ in the long run

variable

average variable cost

variable costs divided by the quantity of output

decreasing returns to scale

when long-run average total cost increases as output increases

product curve and the marginal product curve of the remaining input will shift when...

you change the quantities of the other inputs

explicit cost

A cost that involves actually laying out money

price-taking firm

A firm whose actions have no effect on the market price of the good or service it sells

increasing returns to scale

An increase in a firm's scale of production leads to lower costs per unit produced

standardized product

Companies look for similarities among markets to offer a standardized product whenever possible. (sometimes called commodity)

TR=

PxQ

Profit=

TR − TC

Profit=

TR-TC

profit/Q=

TR/Q-TC/Q

total cost curve

a graph that shows the relationship between total variable cost and the level of a firm's output

fixed cost

a periodic charge that does not vary with business volume (as insurance or rent or mortgage payments etc.)

there are diminishing returns to an input when

an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.

perfectly competitive industry

an industry in which producers are price-takers

marginal cost=

change in total cost/change in quantity of output

TR = TC

firm breaks even

P<ATC

firm incurs loss

TR < TC,

firm incurs loss

P > ATC

firm is profitable

the short run individual supply curve shows

how an individual firm's profit-maximizing level of output depends on the market price, taking fixed cost as given.

Whenever the market price equals the minimum average total cost,

producer breaks even

Whenever the market price exceeds the minimum average total cost

producer is profitable

Whenever the market price is less than the minimum average total cost,

producer unprofitable

long-run average total cost curve

shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost for each level of output

A firm will cease production in the short run if the market price falls below the ______ _____, which is equal to minimum average variable cost.

shut down price

break even price

the market price at which it earns zero profits.

if break even price is higher than market price..

theres a loss and its measured by the rectangle shaded below it

short run market equilibrium

when the quantity supplied equals the quantity demanded, taking the number of producers as given.