Econ Ch. 8

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diseconimies of scale

exist when long-run average costs increase as output increases

economies of scope

exist when the total cost of producing 2 products in the same firm is lower than when the products are produced by separate firms

economies of scale

exists when long-run average costs decline as output increases

when firms in monopolistic competiton sustain economic losses, firms tend to

exit the market

cost complementary exist when

multiproduct cost function when the marginal cost of producing one output is reduced when another product is increased (doughnuts and doughnut holes)

monopolistic competition uses

niche marketing green marketing

in order to maximize profits in the short run, a manger must determine how much output to produce given

only variable inputs in his control

what is the price elasticity of demand facing an individual firm in perfect competition

perfectly elastic

what happens in a perfectly competitive industry when firms earn profits?

price falls profits of remaining firms fall supply increases

in perfect competition, profits are maximized at a level of output such that

the vertical distance between the revenue line and cost curve is greatest

Key conditions for perfect competition

1. many buyers and sellers 2. each firm in the market produces a homogeneous product 3. buyers and sellers have perfect information 4. no transaction costs 5. free entry and exit

define the competitive firm's demand

Df=P=MR

a perfectly competitive firm maximizes profits at a level of output such that market price

EQUALS marginal cost

To maximize profits, what level does a monopolistic competitive firm produce

M(R)Q= M(C0Q

a firm should shut down where

P < AC

long run properties of perfect competiton include

P=MC P= min AC

in the long run perfectly competitive firms produce a level of output such that

P=MC P=minimum of AC

key difference in monopoly and monopolistic competition

There are no barriers to entry in monopolistic competition

monopolistic competition produces outputs where

ATC> minimum average cost P>MC P=ATC

ex of perfect competition

agriculture computer software

marginal revenue is

change in total revenue from one-unit change in output

The monopolist is restricted to price-quantity combinations that lie on the demand curve as a result of decisions made by

consumers

since each producer has no influence on price, the demand curve for the individual firm is

horizontal line equal to market price

when a monopolist increases output by one unit, total revenue

increases by less than price

economies of scope tend to encourage

larger firms

when many buyers and sellers freely enter and exit a market having similar, yet differentiated products, it is called

monopolistic competition

fundamental difference between monopolistic competition and perfect competition

products in monopolistic competition are differentiated

in perfect competiton

profit= revenues - costs

pi= P(Q) -C(Q) defines

profits

as firms exit a competitive industry in the long run, what happens to the profits of the remaining firms

profits increase due to increased market price

on a graph, profits are given by vertical distance between the cost function and

revenue line

a period of time where at least one input is fixed is called the

short run

monopoly

situation where a single firm serves an entire market for a good which there are no close substitutes

marginal revenue is the

slope of the total revenue curve

in a perfectly competitive market where firms chose output based on price,

supply curves exist


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