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58 Cards in this Set

  • Front
  • Back
Business firm
a business organization controlled by a single management that provides a good service in a market for profit
Types of firms
sole proprietroship:single owner who has control. Risky because unlimited liability
Partnership: several owners, respinsibilities of partners, owners have control, unlimited liability.
Corporation: fictitious legal person, separation of ownership from control, stockholders own the firm and have limited liability.
Firms maximize profit
(pi symbol) TR=PQ
profit= TR-TC
Economic vs Accounting Profit
Accounting: TR- total accounting cost- explicit cost of production
ECONOMIC:TR- TCe-> explicit and implicit cost. (foregone wages, foregone interest).. ZERO ECONOMIC PROFIT IS NORMAL. IN FACT, IT PROMOTES MARKET EQUILIBRIUM.
production function
Inputs->____->outputs. curve showing maximum amount of output a firm can produced from different combinations of inputs. All other inputs held constant.
Y=F(K,L). Output is a function of capital and labor
To find market demand curve
Add individual demand curves
consumer surplus
are of triangle. benefit recieved by consumers since the market price is less than the maximum price they would be willing to pay.
law of diminishing (marginal) returns
As a variable input is added in production, holding other inputs constant, the marginal product of that input will eventually decline.
Maximization of total revenue
If charged flatrate-area of triangle applied to the entire demand triangle.
Accounting Cost
Explicit costs of production->dollars sacrificed, and payed out, for a cost.
Economic Cost
Implicit (value of something sacrificed when no direct payment is made)and explicit costs of production.
Total Product of labor
maximum output produced from different quantities of labor, holding capital constant.
Marginal Product of Labor
additional output produced from one more unit of labor. =change in TPl/change in L
Overall, since capital is held constant, marginal product diminishes as more and more people share fixed input.
If APl is increasing, that means that MPl is greater than APl, because each worker is contributing mroe than the previous. If APl is decreasing, that meanst that marginal is < average.
Average Product of Labor
average output produced per worker. = TPl/L
Fixed inputs
cannot vary in the shortrun (when one input is fixed). Longrun- all inputs variable.
Total Fixed Costs
cost of fixed inputs. held constant in shortrun. see paper for graph. TVC+TFC
Total Variable Costs
Costs of variable inputs. increases because eventually its going to take more labor
Average Fixed Costs
Average variable cost
Average Total Cost
Marginal Fixed Costs
MArginal Cost
Long Run Curve
series of ATC curves.
Economies of scale.
Long Run average Total cost decreases as output increases in the long run. Long-run total cost is rising at a smaller level than output- a benefit of specialization- less workers for specific task.
Profit maximization
where MR=MC, and if a firm's price is fixed, P=MR. Then, profit maximization is P=MC
When TR=TC
the firm breaks even
Constant Returns to Scale
Long-RUn Average Cost is unchanged as output increases
when production has room to expand before reachin diseconomies of scale.
Diseconomies of scale
longrun average total cost increases as output increases. see graph- large business- cost exceeds output.
Perfect competition
characterized by:
many small firms, homogeneous products, no barriers to entry or exit, perfect information.
Π maximization in perfect competition
3 conditions:
1) P=MC, generally, MR=MC
2)MC is increasing
3)P>AVC. shut down point is when P=AVC.
Firmsmake Π or loss in the shortrun..
Π ecourages other firms to enter.
Breakeven Price
here TR=TC
Shutdown point
P≤AVC. when firm is indifferent between continuing operations and shutting down, becasue, if multiplied by Q, we obtain TR vs TVC.
Long Run Equilibrium
1) technical efficiency- firms produce at minimum point of ATC curve
2) Allocative efficiency- sum of consumer surplus and producer surplus is mazimized is maximized
Why is P=MC?
In a perfectly competitive market, price=demand curve. If price is greater than MC, more profits can be made.
profit or loss in shortrun =
difference between MC and ARC
The only seller of a good or service that has no close substitutes. Aaumptions:
1) only 1 firm
2) no good substitues
3) Barriers to entry: economic, economies of scale, control over scarce input, patents, and franchises.
4) perfect information.
Natural monopoly
one firm can produce at a lower cost per unit than can two or more firms.
profit maximization in monopoly
MR=MC, Price >MR
MR=1/2 demand curve
TO find price under monopoly
plug Q obtained fron MR=MC equations, into the demand equation.
The variation from perfect competition is that..
Consumer surplus is less, and in perf comp, P=MC, when the consumer is willing to pay the price that is just equal to the marginal cost of producing that unit. THe monopolist restricts output to maximize profit. Also, deadweight, which is the loss to society created by an inefficiency in the market. Area of the triangle that is the difference between monopoly and perfect competition.
monopolist's supply curve
doesnt have one. Q is where MC=MR.
A monopoly has a profit when
When a monopoly takes over,
the old competitive market supply curve becomes the monopoly;s MC curve
Rent-seeking activity
costly action a firm undertakes to establish or maintain its monopoly status
Price discrimination
dependent of the elasticity of demand
Monopolistic Competition
many firms selling products that are differentiated, and in which there is easy entry and exit (elastic demand)
ex. restaurants, movie theaters, gas stations
1) many firms in the market
2) no barriers to entry or exit
3)Product Differentiation through advertising and trivial prodict changes
4) perfect information
Reason for differentiation
the firm will lose some, but not all of its costumers. Therefore, MR=MC level of production, but price determined by demand curve. Also in the long run, zero economic profit due to easy entry and exit.
Monopolistic competition is not technically efficient
because operate where P=ATC, and both the demand curve and the ATC curve is downward sloping, and Πe is zero. In perfect competition, production is at the minimum of ATC.
too many firms producing too little output.
Excess Capacity
too many firms producing too little output. differece between production under monopolistic and [erfect competition
Nonprice competition
any action a firm takes to increase demand for its product- better service, product guarantees, free home delivery
a market structure in which a small number of firms are strategically interdependent
Assumptions:few large strategically interdependent settlers, barriers to entry or exit, homogeneous or differentiated products, perfect information
kinked demand curve
shows that firms have price stability event if marginal costs change. although there is a discontinuity, MR will remain = MC.
Game Theory
An approach to modelicng the strategic interaction of oligopolists in terms of moves and coutnermoves
Dominant Strategy
The strategy that is best for a player no matter what the other player choses
Nash Equilibrium
each player is taking the best action for herself, given the actions taken by al other players
Prisoner's Dilemma
how to chose a strategy without knowing the other person's
A sort of explicit collusion-a group of firms that secelcts a common price that maximizes total industry profits. If a member produces more than her allotted portion, then the group's output rises and prices fall.