Micro Test chapters 11-16
A short-run shutdown point is when
price is less than the minimum average variable cost.
in the long run, all inputs are variable
so only economies of scale can influence the shape of the long run cost curve
The market supply curve in a competitive market is
the horizontal sum of quantities provided by each individual seller at a particular price.
Incentive-compatible contract
the incentives of each of the two parties to the contract are made to correspond as closely as possible
marginal cost
the increase in total cost that arises from an extra unit of production
Marginal revenue and marginal cost
Are key concepts in determining the profit, maximizing or loss, minimizing, level of output of any firm
As the size of the firm increases, monitoring cost generally increase
As the size of the firm increases, team spirit, or Moral generally decreases
Why does Bangladesh use production techniques that require more workers per acre of land then do the techniques used in the United States?
Bangladesh uses more labor intensive techniques, then does the United States because the price of labor is much lower in Bangladesh relative to the United States. Production in both countries is economically efficient.
True or false? Google exploits it's monopoly position by charging high prices to consumers.
False. Google actually provides a free search engine to individuals. The concern about google, primarily relates to its other practices, such as its use of the data, it collects on individuals.
To find profit graphically
Find the point where MC equals MR
Why do firms maximize total profit rather than profit per unit?
Firms are interested in getting as much for themselves as they possibly can. Maximizing total profit does this. Maximizing profit per unit might yield very small total profits
firms are likely to operate on what portion of the marginal productivity curve
Firms are likely to operate on the downward-sloping portion of the marginal productivity curve because on the up-ward sloping portion, firms could increase workers output by hiring more workers. A firm will continue to hire more workers at least to the point where diminishing marginal productivity sets in
Why isn't profit maximization, an especially good assumption to make about real world firms?
Firms are not interested in just short-run profits. They are also interested in long-run profits. So affirm might sacrifice short-run profits for higher long-run profits. Also, those making the decisions for the firm are not always those who own the firm.
If economic profit is being made
Firms will enter and compete that profit away
A monopolistic firm takes into account that its output decision can affect price
Its marginal revenue is not its price
Why are larger production runs often cheaper per unit than smaller production runs
Larger production runs, are generally cheaper per unit than smaller production runs because of indivisible set up costs, which do not vary with the size of the run
The competitive pressures a firm faces
Limit it's laziness
Short - Run profit is not the focus
Long-run profit is
Firms maximize profits where
MC=MR
Profit maximizing condition
MC=MR=P
Technical efficiency differs from economic efficiency in that
a firm could be technologically efficient but economically inefficient.
Natural ability
a firm is better at producing the good than anyone else
Monopoly
a market structure in which one firm makes up the entire market
Monopolistic competition
a market structure in which there are many firms selling differentiated products and few barriers to entry
Oligopoly
a market structure in which there are only a few firms and firms explicitly take other firms' likely response into account
Contestable market model
a model of oligopoly in which barriers to entry and barriers to exit, not the structure of the market, determine a firm's price and output decisions
Cartel model of oligopoly
a model that assumes that oligopolies act as if they were monopolists that have assigned output quotas to individual member firms of the oligopoly so that total output is consistent with joint profit maximization
A platform monopoly differs from a traditional monopoly in that
a platform monopoly is a firm which is uniquely positioned to sell commodities produced by other firms.
production table
a table showing the output resulting from various combinations of factors of production or inputs
Economists realize an important disconnect between theory and practice is that
accurate information is not always available to entrepreneurs.
firm
an economic institution that transforms factors of production into goods and services
Corporate takeover
another firm or a group of individuals issues a tender offer (that is, offers to buy up the stock of a company) to gain control and to install its own managers
Economies of scale is a term that means
as a firm is able to change all of its inputs, the result will be lower per-unit cost curves.
technical efficiency
as few inputs as possible are used to produce a given output
the law of diminishing marginal productivity
as more and more of a variable input is added to an existing fixed input, eventually the additional output one gets from that additional input is going to fall
Constant returns to scale means
average cost remains the same although output level changes.
A profit-maximizing perfectly competitive firm is producing where MR=MC and has an average total cost of $4 and it gets a price of $3 for each good it sells. In the short-run the firm should
continue to produce in the short-run so long as the average variable cost is no greater than $3.
diminishing marginal productivity is not the cause for
diseconomies of scale
implicit costs are generally not included for accountants because they're
estimations
In perfect competition
firms can only get the price as determined in the market, so its marginal revenue is equal to that price.
X-Inefficiency
firms operating far less efficiently than they could technically
lazy monopolists
firms that do not push for efficiency, but merely enjoy the position they are already in
Firms
1. Organize factors of production2. produce goods or services3. sell produced goods and services
What is the role of the entrepreneur central to the production process in the economy?
Economic activity does not just happen. Some dynamic, driven individual must instigate production. That dynamic individual is called an entrepreneur.
In the short run, price does more of the adjusting
In the long run, more of the adjustment is done by quantity
The role of an "entrepreneur" in the context of a firm is so important because
the entrepreneur is the person who ultimately determines a an action is worth the risk of failure and acts on that belief.
A "platform monopoly"
uses economies of scope to lower average total cost across its business and earn larger profits.
The long run supply curve is more elastic
Then the short run supply curve
total costs
explicit costs + implicit costs
Marginal product measures
the change in output when another unit of the variable input is employed.
Judgment by performance
we should judge the competitiveness of markets by the performance (behavior) of firms in that market
Judgment by structure
we should judge the competitiveness of markets by the structure of the industry
The relationship between marginal cost and average cost is that
when average cost is increasing it must be true that marginal cost is greater than average cost.
Economies of scope is best described as what happens
when cost curves shift down when a firm produces a related good.
economies of scale
when long-run average total cost declines as output increases
diseconomies of scale
when long-run average total cost increases as output increases
For a monopolistic competitor in long-run equilibrium
(P = ATC) ≥ (MC = MR)
economic profit
(explicit and implicit revenue) - (explicit and implicit cost)
Three causes for the decline in antitrust enforcement
1. Anti-trust laws are known and prevent monopoly actions from occurring 2. Globalization has changed American ideology. 3. The rate of technological change has increased.
The four distinguishing characteristics of monopolistic competition are
1. many sellers 2. differentiated products 3. multiple dimensions of competition 4. easy entry of new firms in the long run
Cartel
A combination of firms that acts, as if it were a single firm; a cartel is a shared monopoly
Marginal cost is all that is needed to determine
A competitive firms supply curve
perfectly competitive market
A market that meets the conditions of (1) Both buyers and sellers are price takers, (2) the number of firms is large (3) No barriers to entry (4) Firms products are identical (5) There is complete information
The Herfindal index
A method used by economist to classify how competitive and industry is, and it where is the largest firms in the industry, more heavily than the concentration ratio does because it's squares marketshares
Why does a monopolist produce less output, then word perfectly competitive firms in the same industry?
A monopolist produces less output, then a perfectly competitive firm, because a monopolist takes into account the fact that increasing output will lower the price of all previous units
Why does a price discriminating monopolist make a higher profit than a normal monopolist?
A price discriminating monopolist makes a greater profit than a normal monopolist because a price discriminating monopolist is able to charge a higher price to those consumers who have less elastic demands
what distingishes accounting profit from economic profit
Accounting profit measures explicit costs and revenues; economic profit includes implicit costs and revenues as well
As the owner of the firm, Jim pays himself $1000. All other expenses of the firm add up to $2000. What would an economist say are the total costs for Jim's firm
An economist would say that he doesn't know what total cost is without knowing what Jim could have earned if he had undertaken another activity instead of running his business. Just because he paid himself $1000 doesn't mean that $1000 is his opportunity cost..
economists measure revenue and costs differently from accountants
An economists specification on revenue and costs is based on opportunity costs, not accounting costs.
Herfindal index
An index of market concentration calculated by adding the squared value of the individual market shares of all the firms in the industry
As firms become larger, monitoring cost increase
And achieving team spirit is more difficult
Natural monopoly
And industry in which a single firm can produce at a lower cost, then can two or more firms
When a firm, lowers price, other firms will go along
And the firm won't gain market share
In long-run equilibrium a perfect competitor makes only a normal profit
Because if there is profit, a new competitor will enter the market, decreasing the existing firms demand
The welfare cost of monopoly is one of the reasons economists oppose monopoly
Because monopolies charge a price that is higher than marginal cost peoples decisions don't reflect the true cost to society
Why can't firms earn economic profit or make economic losses in the long run?
Because of the entry and exit of firms
If production involved only technical relationships, and had no social dimension, what would the long run average total cost curve look like?
Because the same technical process could be used over and over again at the same cost the long-run average cost curve would never become upward-sloping
In a competitive equilibrium, the total consumer and producer surplus is the area
Below the demand curve and above the marginal cost curve up to market equilibrium quantity
First mover advantage
Benefits gained from being the first to gain a significant share of a market
How does the equilibrium for a monopoly differ from that for a monopolistic competitor?
Both a monopoly and a monopolistic competitor produce where marginal cost equals marginal revenue. The difference is the position of the average total cost curve. For a monopolistic competitor, the average total cost curve must be tangent to the demand curve because a monopolistic competitor makes no economic profits in the long run. A monopoly can make economic profits in the long run, so it's average total cost can be below the price.
Equilibrium output for the monopolist, like equilibrium output, for the competitor, is determined by the MC equals MR condition
But because the monopolists marginal revenue is below its price, its equilibrium output is different from a competitive market
firms will increase their output in response to increase in market demand even though that increase in output will cause the market price to fall and make all firms collectively worse off.
But each firm acts in there own self interests.
Corporate takeover, or simply the threat of a takeover
Can improve a firms efficiency
The monopolist's profit can be determined only by
Comparing average total cost to price
Diminishing marginal productivity refers to the decline in productivity, caused by increasing units of variable input being added to a fixed input
Diseconomies of scale referred to the decreases in productivity that occur, when there are equal percentage increases of all outputs
Discussions of the competitive process
Don't easily fit into needs simple models
Self interest, seeking individuals
Don't like competition for themselves, although they do like it for others
To find a monopolist's level of output, price, and profit, follow these four steps
Draw the marginal revenue curve, determine the output, the monopolist will produce: the profit, maximizing, level of output is where the MR and MC curves, intersect, step three determine the price the monopolist will charge: extend a line from where MR equals MC up to the demand curve. Where this line intersects the demand curve is the monopolist price. Determine the prophet, the monopolist will earn: subtract the ATC. from price at the profit, maximizing level of output to get profit per unit. Multiply profit per unit by quantity of output to get total profit
What is the difference between an economy of scope and an economy of scale?
Economies of scale are economies that occur because of increases in the amount of one good a firm is producing. Economies of scope occur when producing different types of goods lowers the cost of each of the goods.
Economies and diseconomies of scale account for the shape of the Long run average total cost curve
Economies of scale, drive average cost down then diseconomies of scale drive average cost up
The monitoring problem is that
Employees' incentives differ from the owners incentives
An oliga pollist spends enormous amounts of time
Guessing what its competitors will do, and it developes a strategy of how it will act accordingly
If the firm described in figure 13 four is producing four units, what would you advise it to do and why?
I would explain to it that the marginal cost of increasing output it's only $12 at the marginal revenue is $35 so it should significantly expand output until eight, where the marginal cost equals, marginal, revenue, or price
Your study partner, Jean, has just said that monopolistic competitor's Use strategic decision making. How would you respond?
I would respond that monopolistic competitor's, by definition, do not take into account the expected reactions of competitors to their decisions; therefore, they cannot use strategic decision making. I would tell Jen she probably meant, " oligopolies, use strategic decision making."
What decision rule does a firm use, when deciding whether to create or maintain of monopoly?
If the additional benefits of creating or maintaining a monopoly exceed the cost of doing so, do it. If they don't, don't do it.
In a perfectly competitive market firms have no incentive to advertise
In a monopolistic competitive market, there is a strong incentive to advertise because their products are differentiated from others
In perfect competition, price is the only dimension on which firms compete
In monopolistic competition, competition takes many forms
draw a graph of both the marginal cost curve and the average cost curve
In the graph, both of these curves are U-shaped, and the marginal cost curve goes through the average cost curve at the minimum point of the average cost curve
When price is above average variable cost
In the short run, a firm should keep on producing even though it's making a Loss
In oligopolies all decisions
Including pricing, decisions are strategic decisions and collusion is much easier
Oligopolistic firms are mutually
Interdependent and can be collusive or non-collusive
The marginal cost curve
Is a graph of the change in the firms, total cost as it changes output
Marginal cost
Is always below average total cost
A monopolist's marginal revenue
Is always below its price
MC equals MR equals P
Is both a profit, maximizing condition and a Los minimizing condition
An important difference between a monopolist and a monopolist competitor
Is in the position of the average total cost curve in long-run equilibrium
A monopolistic competitor
Is simply a monopolist that makes zero profit
The mutual interdependence
Is the big difference between monopolistic, competition and oligopoly
One of the things that limits oligopolies from acting as a cartel
Is the threat of outside competition
When a monopolist price discriminates
It charges individuals high up on the demand curve, higher prices, and those low on the demand curve lower prices
If marginal revenue is equal to marginal cost
It does not make sense to increase or reduce production
Marginal revenue curve for a monopolist tells us the additional revenue The firm will get by expanding output.
It is a downward sloping curve that begins at the same point as the demand curve, but has a steeper slope
Why is it almost impossible for a perfect monopoly to exist?
It is almost impossible for perfect monopoly to exist, because preventing entry is nearly impossible. Monopoly profits are a signal to potential entrants to get the barriers to entry removed.
If marginal costs are decreasing, what must be happening to average variable costs?
It is impossible to say because it is the magnitude of marginal cost relative to average variable cost that determines what is happening to average variable cost
If marginal costs are increasing, what is happening to average total costs?
It is impossible to say what is happening to average total costs on the basis of what is happening to marginal costs. It is the magnitude of marginal costs relative to average total costs that is important.
If marginal revenue is below marginal cost
It makes sense to reduce production. Doing so decreases marginal cost and increases marginal revenue
Most real world production doesn't take place in owner, operated businesses
It takes place in large corporations
Why is it difficult for firms in an industry to maintain a cartel?
Maintaining a cartel requires firms to make decisions that are not in their individual best interest. Such decisions are hard to enforce, unless there is an explicit enforcement mechanism, which is difficult in the cartel.
Output is 100 units. The marginal product at that point is 40 units and the average product is 30 units. The price of the output in the market is $50. The cost of the variable input is $10.
Marginal cost is $0.25.
Why doesn't a manager have the same incentive to hold down costs as an owner does?
Money
Why do monopolistically competitive firms advertise while perfect competitors do not
Monopolistically, competitive firms advertise because their products are differentiated from others. Advertising can convince people that affirms product is better than that of other firms, and increase demand for its product. Perfect competitors, and contrast, have no incentive to advertise since their products are the same as every other firms product and they can sell all they want at the market price
Explain, using supply and demand curves, why most agricultural markets are not perfectly competitive
Most agricultural markets are not perfectly competitive, because the gains to producers from moving away from competitive markets are fairly large and, for small deviations from competitive markets, the costs are fairly small to those suppliers and consumers or kept out. This can be seen in the accompanying graph.
Why would most economist be concerned about third-party-payer systems in which the consumer and the payer different
Most economist are concerned about third-party payer systems because of the problems of monitoring. It is the consumers who have the strongest incentive to make sure that they are getting value for their money. Any third-party payer system reduces the consumers vigilance and therefore puts less pressure on holding down costs.
Platform monopolies tend to be
Natural monopolies
Does learning by doing cause the average cost curve to be downward sloping?
No. Learning by doing causes a shift in the cost curve, because it is a change in the technical characteristics of production. It does not cause the cost curve to be downward-sloping - it causes it to shift downward
what are the normal shapes of marginal productivity and average productivity curves
Normally the marginal productivity curve and average productivity curve are both inverted U shapes
Platform business
Often do not charge for the platform they provide rather they earn their revenues from selling ad space to other businesses, and by selling data about people who use their platform to firms so that they can better target their advertising
Although profit is one goal of a firm
Often firms focus on other intermediate goals, such as cost and sales
Self interested managers are interested in maximizing firm profit
Only if the structure of the firm requires them to do so
Monopolists see that the monopolist benefit because they do what's in the firms best interest not the consumers
Perfectly competitive firms cannot do what's in their best interest
In a monopoly
Price controls can increase efficiency
What is meant by the phrase competition is for losers
Real world firms are fighting to create and maintain monopolies. According to Peter Thiel, the winners are those that have a monopoly in face little competition, because they are better than the other firms. Only the losers face significant competition.
Judgment by structure
Seems unfair on a gut level
Long-run costs will always be less than or equal to
Short run cost at the same level of output
Which of the following accurately lists the attributes of an oligopoly?
Significant barriers to entry, price setter, few competitors, similar but distinguishable products.
when marginal cost equals the minimum point of average variable cost, what is true about the average productivity and marginal productivity of workers
Since the average productivity and marginal productivity of workers are the mirror images of average costs and marginal costs, and when the marginal costs and average costs intersect, the two are equal, it follows that the average productivity and marginal productivity of workers must also be equal at that point.
The herfindahl index is 1500. Using a structural analysis of markets approach, what would you conclude about this industry?
Skip this
If a firm raises its price, other firms won't go along
So the firm loses its market share
If Beret's suddenly became the "in" thing to wear, what would you expect to happen to price in the short run? Long run?
Suddenly become in the thing to wear what caused the demand for berets to shift out to the right, pushing the price up in the short run. In the long run, the market is probably not perfectly competitive, and it would likely push the price down because they're probably are considerable economies of scale in the production of berets
The marginal revenue curve
Tells us the change in total revenue when quantity changes
As long as a firms, total revenue is covering its total variable cost
Temporarily producing at a loss is the firms best strategy because it's making a smaller loss then it would if it were to shut down
Marginal cost
The change in total cost associated with a change in quantity
Marginal Revenue (MR)
The change in total revenue associated with a change in quantity
how can the demand curve for the market be downward-sloping but the demand curve for a competitive firm be perfectly elastic?
The competitive firm is such a small portion of the total market that it can have no effect on price. Consequently it takes the price as given, and, hence, its perceived demand curve is perfectly elastic
The Herfindal index is 1500. Using a contestable market approach, what would you conclude about this industry?
The contestable market approach looks at barriers to entry, not structure. Therefore, we can conclude nothing about the industry from the Herfindal index.
If a competitive firm makes zero profit, why does it stay in business?
The costs for a firm include the normal costs, which in turn include a return for all factors of production. Thus, it is worthwhile for a competitive firm to stay in business, since it is doing better than, or at least as well as, it could in any other activity
How was market competitiveness judged in the standard oil and Alcoa cases?
The court decided that standard oil had engaged in systematic abuse it unfair, business practices, and therefore was guilty of antitrust violations, and must be broken up. It was judged by performance. In the Alcoa case, the Supreme Court decided the structure of the market, not the company's performance, what is the appropriate standard by which to judge cases
Is the demand curve, as perceived by an oligopolist likely to be more or less elastic for a price increase or a price decrease
The demand curve perceived by an oligopolist, is more elastic above the current price, because it believes that others will not follow Price increases. If it increased price, its quantity demanded would fall by a lot. The opposite is true below the current price. The demand curve below. Current price is less elastic. Price declines would be matched by competitors and the oligopolist would see little change in quantity demanded with a price decline.
If the Herfindal index is less than 1000
The department of justice generally assumes the industry is sufficiently competitive
what determines the distance between average total cost and average variable cost
The distance between the average total cost, and the average variable cost is determined by the average fixed cost at that quantity. As quantity increases, the averaged Fixed cost decreases, so the two curves get closer and closer together.
FP is greater than minimum of AVC
The firm will continue to produce in the short run
If P is less than minimum of AVC
The firm will shut down
Anti-trust policy
The governments policy toward the competitive process
In an oligopoly
The higher the barriers, the more the price exceeds cost
If the four-firm concentration ratio of an industry is 60%, what is the highest Herfindal index that industry could have? What is the lowest?
The highest Herfindal index for this industry would occur if one firm had the entire 60% and all other firms had an infinitesimal amount, make in the Hirfindoll index slightly over 3600. The lowest herfindal index this industry could have would occur if each of the top four firms had 15% of the market.
Market supply curve
The horizontal sum of all the firms, marginal cost curves taking account of any changes in input prices that might occur
Why is the long-run average total cost curve generally considered to be a U-shaped curve
The long run average total cost curve is generally considered to be U shaped bc initially there are economies of scale, and for large amounts of production, there are diseconomies of scale
Why is the competitive price impossible for an industry that exhibits strong economies of scale?
The marginal cost curve for an industry that exhibit Strachan economies of scale is always below average total costs. Therefore, the competitive price, where P = MC, will always result in loss is for firms. Firms would not enter into such an industry, and there would be no supply.
why does the marginal cost curve intersect the average variable cost curve at the minimum point?
The marginal cost curve intersects the average variable cost curve at the minimum point, because once the marginal cost exceeds average variable costs, the average variable costs must necessarily began to rise, and vice versa
Because the marginal cost curve tells us how much of a produced good a firm will supply at a given price
The marginal cost curve is the firms supply curve
In the early 2000s, many airlines were making losses, yet they continue to operate. Why?
The marginal cost for airlines is significantly below average total cost. Since they're recovering, their average variable cost, they continue to operate. In the long run, if this continues, some airlines will be forced out of business.
Suppose the total cost of producing 100 units was $1000 and the total cost of 200 units was $2500.
The marginal cost of producing at 200 units is $15.
When the demand curve has a kink
The marginal revenue curve must have a gap
If price is less than average cost
The monopolist will incur a loss
If price exceeds average total cost at the output, it chooses
The monopolist will make a profit
If price equals average total cost
The monopolist will make no profit, (but it will make a normal return)
Where a natural monopoly exists
The perfectly competitive solution is impossible since AC are not covered where MC = P If this monopoly is required by the government, it will incur a loss and be subsidized by the government
Shut down point
The point below which the firm will be better off if it shuts down, then if it stays in business
What is the problem with regulations that set prices relative to costs?
The problem with regulation that sets prices relative to costs is that this removes the incentive for firms to hold down costs and can lead to X-ineffiency. While, in theory, regulators could scrutinize every cost, and practice that is impossible - there would have to be a regulatory board duplicating the work that a firm facing direct market pressures, undertakes, in its normal activities
Reverse engineering
The process of a firm, buying other firms, products, disassembling them, figuring out what's special about them, and then copying them within the limits of the law
production
The process of creating goods and services
Why is the short - run average cost curve a U-shaped
The short- run average cost curve initially slopes downward, because of increasing marginal productivity and large average fixed costs, and then begins sloping upward because of diminishing marginal productivity, giving it a U shape.
What distinguishes the "short-run" from the "long-run" for a firm?
The short-run is defined by a time period for which at least one input cannot be changed, and the long-run is the time frame where all inputs can be changed.
In what way does the threat of a corporate take over place competitive pressures on a firm
The threat of a corporate take over place is competitive pressures on firms, because it creates the possibility that the managers will be replaced and lose all their purse and above market equilibrium pay
What are the two extremes an oligopoly model can take?
The two extremes in oligopoly model can take are (1) a cartel motto, which is the equivalent of a monopoly, and (2) a contestable market model, which, if there are no barriers to entry, is the equivalent of a competitive industry
Total profit is maximized where
The vertical distance between total revenue, and total cost is greatest
The central element of oligopoly is that
There are a small number of firms in an industry, so that when making decisions a firm, must take into account the expected reaction of other firms
Which of the following items is not an attribute of a perfectly competitive market?
There is one seller of the commodity who dominates the pricing decisions for all.
When firms are allowed to pass on, all cost increases to earn a normal profit on those costs
They have little or no incentive to hold down costs
True or false? Industry standards tend to reduce competition in a market with Network externalities.
True. It is difficult for new firms to challenge and establish a market standard, because a new standard will not benefit as much from the framework externalities established by the existing standard.
True or false? If a process is economically efficient it is also technically efficient.
True. Since an economically efficient method of production is that method that produces a given level of output at the lowest possible cost, it also must use as few inputs as possible. It is also technically efficient
Informal collusion is an important reason
What prices are sticky
network externality
When greater use of a product increases the benefit of that product to everyone without them paying for it
Economies of scope
When the costs of producing products are independent, so that it is less costly for a firm to produce one good when it's already producing another
You can distinguish between monopolistic, competition and oligopoly by
Whether or not firms, explicitly take into account competitors reactions to their decisions
why is the assumption of no barriers to entry important for the existence of perfect competition
Without the assumption of no barriers to entry, firms could make a profit by raising price; hence, the demand curve they face would not be perfectly elastic and hence, perfect competition would not exist
If marginal cost is below marginal revenue
You should increase production because total profit will rise.
price taker
a buyer or seller who cannot affect the market price
A "takeover" occurs when
a company is underperforming and another group of owners buys controlling interest so as to make the firm more profitable.
If marginal revenue does not equal marginal cost
a firm can increase profit by changing output
long-run decision
a firm chooses among all possible production techniques
Why do monopolies exist?
because of barriers to entry that prevent other firms from entering the market
all economically efficient production processes are technically efficient
but not all technically efficient production processes are economically efficient
By obtaining a college degree you are
causing your personal production function to shift both upwards and to the right.
Firms often provide technical or educational training to their employees because
doing so makes the employees more efficient/productive, thereby shifting downwards the cost curves and increasing profits.
The difference between economic profit and accounting profit is that
economic profit is what is earned over and above normal profits, and that will always be less than the accounting profit.
The shape of the long-run cost curve is due to the existence of
economies and diseconomies of scale
the law of diminishing marginal productivity doesn't apply to the long run since
in the long run, all inputs are variable
in the long run, all inputs are variable
in the short run, some inputs are fixed
An entrepreneur is best described as a person who
is able to see and then take advantage of an opportunity to generate an economic profit.
The key characteristic of a monopolist
its output decision affects its price. An increase in output lower the price on all previous units.
individuals control the production of
land, labor, and capital
all costs are variable in the
long run
When looking at the short run cost curves, it is always the case that
marginal cost intersects average variable cost and then average total cost at the minimums of the two average curves.
Implicit collusion
multiple firms make the same pricing decisions even though they have not explicitly consulted with one another
Three important barriers to entry
natural ability, economies of scale, government restrictions
Economies of scale can create
natural monopolies
Monopolistic competition
occurs when firms with distinct but differentiated commodities compete in a market.
Eventually diseconomies of scale will plague a firm because
of the difficulty of monitoring costs and a lack of worker connectedness to the enterprise.
Production functions have their unique shape because
of the law of diminishing marginal productivity.
the demand curve for a perfectly competitive firm is said to be
perfectly elastic
What are two things you must know to determine the profit maximizing output
price and marginal cost
Marginal revenue equals marginal cost
profit maximizing level of output
If there were no barriers to entry
profit-maximizing firms would always compete away monopoly profits
An increase in the cost of a fixed input will cause the short-run cost curves to
shift upwards.
Strategic decision making
taking explicit account of a rival's expected response to a decision you are making
the economically efficient method of production is the
technically efficient method of production that has the lowest cost
marginal product
the additional output that will be forthcoming from an additional worker, other inputs constant
total revenue
the amount a firm receives for the sale of its output
minimum efficient level of production
the amount of production that spreads setup costs out sufficiently for a firm to undertake production profitably
The long-run supply curve shows
the combined outputs of all firms for a given price when given sufficient time to adjust output to that price.
Indivisble setup cost
the cost of an indivisible input for which a certain minimum amount of production must be undertaken before the input becomes economically feasible to use
Monitoring costs
the costs incurred by the organizer of production in seeing to it that the employees do what they're supposed to do
If fixed costs change then this means
the firm has been able and willing to change at least one fixed input.
short-run decision
the firm is constrained in regard to what production decisions it can make
Dead-weight loss refers to
the foregone net social gain to society due to the reduced output and higher price that occur in a monopoly
A competitive firms marginal revenue is
the given market price
In the long-run firms can change all inputs to accommodate target outputs. This means
the long-run average cost curve is an envelope curve containing all short-run average cost curves.
The minimum efficient level of output for a firm is where
the long-run average cost curve is at a minimum.
Profits are maximized for a perfectly competitive firm when it produces where
the marginal cost of the next unit of output is equal to its marginal revenue, which is equivalent to the market price.
economically efficient
the method that produces a given level of output at the lowest possible cost
Monitoring problem
the need to oversee employees to ensure that their actions are in the best interest of the firm
Normal profit is
the opportunity cost to the owner, being the profit s/he could have earned at another venture.
The envelope relationship
the relationship between long-run and short-run average total costs
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Concentration ratio
the value of sales by the top firms of an industry stated as a percentage of total industry sales
The conditions which have to be present for a monopoly to exist include
there is a single seller, there are no close substitutes, and there are insurmountable barriers to entry.
Price discriminate
to charge different prices to different individuals or groups of individuals
Constant returns to scale
when long-run average total cost is constant as output increases
Technological lock-in
when prior use of a technology makes the adoption of subsequent technologies difficult
