Microeconomics Perfect Competition Monopoly
Short run
A period during which at least one of a firm's resources (factors of production) is fixed.
Long run
A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.
Break Even Point
When economic profits = 0, and total revenue = total costs. The total revenue increases faster than total costs. break even price: P=minimum ATC Rhyme to remember: BEP = Minimum ATC
Marginal Principle
compares increasing the level of an activity as long as its marginal benefit exceeds its marginal costs. Decrease the level of an activity if the marginal costs exceed marginal benefit. If possible choose the level at which the marginal benefit equals the marginal cost. what i wrote: increases quantity utilization marginal revenue = marginal cost marginal revenue = price ...for perfect competiton.
Economies of Scale
costs fall as the firm gets benefits from operating at a larger level
Naturally Monoply
-acception to govt. ban on monopolies because its beneficial to society. -imposed average cost pricing, price ceilings, and stronger taxes. -Example: edison
Monopoly Characteristics
-one firm sells unique product - firm is a price maker -highly inefficient -high barriers to entry (Economies of scale) -high profits in the long run -Example: electricity
Why normal profits are made in the long run in perfect competition (supernormal profits)
1. Supernormal profits are made in the short run by individual firms 2. Market supply increases as new firms enter the market 3. Price decreases as supply increases 4. As price decreases, normal profits are made in the long run
Total Cost
= total fixed cost + total variable cost
Average revenue
Average revenue Total revenue divided by the quantity of output sold. AR = Price
Variable Cost
Change in cost * Amount of out put
Normal profit
Economic profit = 0. AR = ATC at the profit maximising level of output.The revenue needed to keep a firm in an industry (in order to cover all opportunity costs of production)
Allocative efficiency
Is achieved when the particular combination of goods that are produced by firms match consumer preferences. P = MC
Marginal Profit
MR-MC
What is the Relationship between Demand and marginal revenue?
MR=D=AR=P The curve for demand and marginal revenue are horizontal for the firm. (Mr. Darth)
Profit maximising level of output
MR=MC
What curve does the Short-Run Supply curve equal?
Marginal Cost Curve S = MC above the minimum AVC.
MR Curve Downward sloping (Monopoly)
Marginal revenue is also downward sloping but that sits below the demand curve. Monopolist will produce in the elastic region of its demand curve, where MR >0
Diseconomies of Scale
Once the firm reaches its optimum or most efficient level, any further expansion will causee costs to rise as the firm has grown too large
Monopoly Socially optimal output
P=MC
Shut-down price
Price = minimum ATC at the profit maximising level of output (MR = MC)
Shut-down price in the short-run
Price = minimum AVC at the profit maximising level of output (MR = MC)
Profit Monopoly
Price > Atc for profit where MR = MC Output Profit maximized in space between demand and ATC curve
Perfectly elastic demand curve
Price elasticity of demand = 0. Any attempt by the firm increase its price above that determined by the market will result in zero units of output being sold.
Shutdown Rule
Short run: If "P<ATC" and "P>AVC", then the firm continues to stay open and minimize its losses. If "P>ATC" and "P<AVC" then the firm will temporarily shut down and minimize its losses. If "P<ATC" and "P=AVC" then its indifferent. Long Run: Exit if P is less than ATC.
Profit
TR-TC TR = P * Q
Constant Returns to Scale
Technically, the term means that the quantitative relationship between input and output stays constant, or the same, when output is increased. Constant returns to scale mean that the firm's long-run average cost curve remains flat.
Marginal revenue
The change in total revenue from an additional unit sold Change in total revenue/change in quantity
Fixed costs
The difference between total costs and variable costs. Costs that do not vary as a firm increases output.
P = minimum AVC
The firm has a loss that is equal to its fixed costs - this is the shut-down price in the short-run
ATC > P > AVC
The firm will make a loss (negative economic profit, subnormal), and as the loss is less than its fixed costs it will still continue to produce in the short-run
P > ATC
The firm will make an economic profit (positive, supernormal).
P = minimum ATC
The firm will make zero economic profit (normal profit), and this is the break-even price for the firm
The firm's supply curve
The firm's marginal cost curve above the shutdown point at the profit maximising level of output (MR = MC)
P < AVC
The price is now below the shut-down price the firm stops operations and will not produce any output and its loss becomes equal to the fixed costs the firm is still obliged to pay.
Marginal Cost
Total Cost incurred for each additional unit of output. Change in total cost/change in quantity
Average total cost
Total cost divided by the quantity of output
Why is Demand Curve Downward sloping (Monopoly)?
demand is downard sloping because it represents the entire industries demand.
