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42 Cards in this Set
- Front
- Back
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4 Decisions for Firms
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1. What Industry
2. How to Organize 3. How Much & Price 4. How to Produce It |
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Total Cost
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TC = Total Fixed Cost + Total Variable Cost
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Average Total Cost
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ATC = Average Fixed Cost + Average Variable Cost
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Economies of Scale
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the more you produce, the cheaper it costs on average
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Diseconomies of Scale
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the more you produce, the more expensive it costs on average
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Profit
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P = Total Revenue - Total Cost
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Shutdown Decision
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P > AVC -> Operate
P < AVC -> Shut Down |
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Profit Maximization
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Marginal Revenue = Marginal Cost
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Monopoly
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One Seller
Barriers to Entry No Close Substitutions |
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Price Discrimination
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Charging multiple prices for the same good
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Explicit Costs
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money that could be used elsewhere
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Implicit Costs
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Foregone Alternatives (wages, interest, depreciation, normal profit)
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Monopolistic Competition
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Many Firms/Buyers
Free Entry/Exit Differential Production |
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Oligopoly
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Small # of Firms
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Game Theory
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1. Who Are Players
2. What Are Rules 3. What Are Strategies 4. What Are Payoffs 5. What Is Equilibrium |
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Dominant Strategy
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A strategy that is always the best response
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Repeated Games
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allows firms to escape dilemmas
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Externalities
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Occurs when the production or consumption of a good affects others besides the decision maker
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Pagovian Taxes
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- tax the good that causes the externality
- set tax = external cost |
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Pollution Permit
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- establish a market for pollution
- gives an incentive to reduce pollution |
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Pagovian Subsidies
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reverse tax
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Excludable Goods
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Owner's can prevent other's usage
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Rivalry
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Use by one individual causes different quality for others
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Public Goods
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non-exclusive
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Private Solutions to Providing Public Goods
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1. Voluntary Donating
2. Indirect Profitability 3. Artificial Excludability 4. Social Pressure 5. Government Provision |
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short run vs. long run for firms
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SR: plant is fixed, labor is variable
LR: everything is variable |
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fixed costs
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costs that are assosciated with plant
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varaible costs
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assosciated with labor
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MC in SR
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decreases and then increases
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long run for firms
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firms can change plant size
firms choose best ATC and produce Q |
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perfect competition
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- many buyers and sellers -- firms are price takers
- no restrictions for entry or exit - no advantages for established firms - all selling identical goods - all buyers and sellers are well-informed about prices - rare to see actual PC - basis for future analysis |
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when to operate
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P > AVC
MR > MC |
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when not to operate
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MR < MC
P < AVC |
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shutdown price
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P = AVC
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break-even price
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P = min. ATC
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profit maximization
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MR = MC
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when P = ATC
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zero profit
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price discrimination
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charging more than one price for same good; often illegal
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natural monopoly
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cheaper for one firm to produce
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monopolistic competition
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in SR, behaves like a monopoly
in LR, entry or exit can occur as entry ocurrs, demand shifts inward, profits decrease until they approach 0 |
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mergers
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generally allowed unless end result is too much mkt. power
- HHI < 1000: mergers are generally allowed - 1000 < HHI< 1800: if merger will raise HHI by more than 100, its not allowed - HHI > 1800: if merger raises by > 50 pts., not allowed |
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market failure
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mkt. power
price controls taxes externalities public goods |
