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35 Cards in this Set
- Front
- Back
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What is the minimum efficient scale of a firm?
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The smalles Q of ouptuput yielding minimum LRAC Long Run Average Costs
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What is the demand curve of a PC firm?
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perfectly elastic!
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What is economic profit?
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Total Revenue - Total Costs
TR-TC (Total costs include normal profit) Normal profit is expected return to entrepreneurial ability |
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What is Avg. Revenue?
And Marginal Revenue? |
Avg. Rev. = TR/Q
Marg. Revenue = Delta TR/Delta Q |
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When can PC arise?
When industry demand is high relative to ___ |
the minimum efficent scale of a firm.
(The smalles Q of ouptuput yielding minimum LRAC Long Run Average Costs) |
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In perfect competition,
___ =____=____ Think about this and use it when answering questions, not just on graphs. You can derive stuff. |
AR=MR=P (also =D i think) hehe smiley
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We all know economic profit is mazimized when MR=MC.
What should a firm do if MR>MC? |
Increase Q output to increase economic profit.
(If MR<MC, firm needs to decrease Q) |
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What are three possible SR profit maximizing outcomes?
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P=AR=MR
P>ATC yields economic profit P=ATC yields zero ec profit P<ATC yields economic loss (firm is earning less than normal profit) |
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Okay, your firm is incurring an economic loss. What do you do??
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If P>AVC continue to produce
if P<AVC, firm should temporatily shut down. |
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Where is the shutodwn point?
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Shutdown point is at Minimum Avg. Variable Cost (AVC)
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What is a perfectly competitive firm's supply curve?
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Its MC curve where it is above the minimum AVC
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What is the SR industry supply curve in PC?
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Horizontal sum of individual firm supply curves.
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What does economic proft do to an industry in PC?
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Attracts new entry, causes rightward shift of industry supply curve, causing falling P and elimination of economic profit. nuts.
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Some interesting things about LR competitive equilibrium
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MR=P=MC, firms maximize SR profit
P=minimum ATC; economic profit is zero, not incentive for firms to exit or enter P= minimum LRAC; optimum plant size; no incentive for firm to change plant size |
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What effect does a permanent shift in D have?
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Decreased demand, falling price,
economic loss and exit. decreased industry supply and then finaly rising P Increased demand is the opposite, ie. rising or increasing price and so forth. |
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What does the chagne in LR Eq. price from a permanent shift in demand curve depend on?
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-external economies
-external diseconomies |
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Waht is an external diseconomy?
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External diseconomies are factors beyond the firms control.
They raise costs as industry output increases. |
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Whats an external economy?
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Factors byeond the control of a firm that
lower costs as industry output increases |
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What does the shape of the LR industry supply curve depend on?
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Existence of external economies (increasng returns to scale) and diseconomies (decreaseng returns to scale. D for Decreaseing).
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the LR Supply curve in PC may have 3 dif. shapes. Tell me abuot them.
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Horizontal for constant-cost industry.
Upward sloping for increaseing cost industry with external diseconomies Downward sloping for decreaseing cost industry with external economies. |
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When is resource use most efficient?
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most highly valued goods are produced
(and other stuff like btter off, etc etc; mb=mc) |
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what does PC require?
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1) Consumers are on their demand = marginal social benefits curve
2) Firms are on their supply = marginal social cost curves (and are technicologicall and econmicaly efficent) and lowest possible LRAC 3. Equilibirum where Price=marginal social benefit=marginal social cost maximum gains from trade (consumer surplus+producer surplus) |
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What LR equilibrium conditions must be satisfied for each firm in a PC industry?
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1) MR=P=MC
implies profits are maximized for each firm 2) P=ATC implies ec. profit is zero, each firm only normal profit 3) P= minimum LRAC implies production takes place at point of Long Run Avg Cost |
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T/F
In LR, all costs are variable? |
T
ie. produce zero output, when TR-TC<0 Total Revenue - tota cost < 0 |
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In SR, shut down as soon as __
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TR<TVC
NB> When TR<TC, there is a loss, BUT continue to produce when TR-TC>TFC |
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In SR, the maximum loss should never exceed the what?
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value of TFC Total fixed costs
p161 max loss in SR=-TFC |
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T/F
The industry demand curve in PC industry is horizontal. |
F. This is for an individual firm, not the whole industry.
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T/F
At prices below minium avg. total cost, a firm will awlays shut fown. |
F
True if P< min AVC False is P>min AVC but <min ATC |
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T/F
The supply curve of a perfectly competitive firm gives the quantites of output supplied at alternative prices as long as the firm earns an economic profit. |
F
As long as P>min AVC |
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T/F
In LR equilibrim, each firm in PC industry will choose the plan size associated with minimum LRAC |
True.
LR, each frim chooses plant size with lowes LR average cost |
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T/F
A PC industry is in LR equilibirium when there is a permanent increase in demand. In the SR, firms will earn an economic proft. |
F
As new firms enter, supply shifts rightward, price falls, ouput each existing firm decreases |
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T/F
A perfectly PC industry is in LR eq when there is a permanetn increase in demand. In the SR, the firms will earn an ec profit. |
T.
Price rises above ATC, creating ec. profit. p252-3 id like to see this graphed |
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In PC industry with external economies, LR industry suply curve is positively sloped
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F -ve
draw cirve and look carefully |
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T/F
resource use efficent as long as MB>MC |
False
MB=MC for efficeny |
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T/F
Resouce use is effiecent as long as consumer surplus = producer surplus |
F
Efficent wehn sum of consumer surplus and producer surplus maximized |
