Microeconomics

Front 1

Business firm

Back 1

a business organization controlled by a single management that provides a good service in a market for profit

Front 2

Types of firms

Back 2

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.

Front 3

Firms maximize profit

Back 3

(pi symbol) TR=PQ
profit= TR-TC

Front 4

Economic vs Accounting Profit

Back 4

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.

Front 5

production function

Back 5

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

Front 6

To find market demand curve

Back 6

Add individual demand curves

Front 7

consumer surplus

Back 7

are of triangle. benefit recieved by consumers since the market price is less than the maximum price they would be willing to pay.

Front 8

law of diminishing (marginal) returns

Back 8

As a variable input is added in production, holding other inputs constant, the marginal product of that input will eventually decline.

Front 9

Maximization of total revenue

Back 9

If charged flatrate-area of triangle applied to the entire demand triangle.

Front 10

Accounting Cost

Back 10

Explicit costs of production->dollars sacrificed, and payed out, for a cost.

Front 11

Economic Cost

Back 11

Implicit (value of something sacrificed when no direct payment is made)and explicit costs of production.

Front 12

Total Product of labor

Back 12

maximum output produced from different quantities of labor, holding capital constant.

Front 13

Marginal Product of Labor

Back 13

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.

Front 14

Average Product of Labor

Back 14

average output produced per worker. = TPl/L

Front 15

Fixed inputs

Back 15

cannot vary in the shortrun (when one input is fixed). Longrun- all inputs variable.

Front 16

Total Fixed Costs

Back 16

cost of fixed inputs. held constant in shortrun. see paper for graph. TVC+TFC

Front 17

Total Variable Costs

Back 17

Costs of variable inputs. increases because eventually its going to take more labor

Front 18

Average Fixed Costs

Back 18

TFC/Y

Front 19

Average variable cost

Back 19

TVC/Y

Front 20

Average Total Cost

Back 20

TC/Y
AVC+ATC

Front 21

Marginal Fixed Costs

Back 21

ΔTFC/ΔY

Front 22

MArginal Cost

Back 22

ΔTVC/ΔY

Front 23

Long Run Curve

Back 23

series of ATC curves.

Front 24

Economies of scale.

Back 24

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.

Front 25

Profit maximization

Back 25

where MR=MC, and if a firm's price is fixed, P=MR. Then, profit maximization is P=MC

Front 26

When TR=TC

Back 26

the firm breaks even

Front 27

Constant Returns to Scale

Back 27

Long-RUn Average Cost is unchanged as output increases
when production has room to expand before reachin diseconomies of scale.

Front 28

Diseconomies of scale

Back 28

longrun average total cost increases as output increases. see graph- large business- cost exceeds output.

Front 29

Perfect competition

Back 29

characterized by:
many small firms, homogeneous products, no barriers to entry or exit, perfect information.

Front 30

Π maximization in perfect competition

Back 30

P=MR=MC.
3 conditions:
1) P=MC, generally, MR=MC
2)MC is increasing
3)P>AVC. shut down point is when P=AVC.

Front 31

Firmsmake Π or loss in the shortrun..

Back 31

Π ecourages other firms to enter.

Front 32

Breakeven Price

Back 32

here TR=TC

Front 33

Shutdown point

Back 33

P≤AVC. when firm is indifferent between continuing operations and shutting down, becasue, if multiplied by Q, we obtain TR vs TVC.

Front 34

Long Run Equilibrium

Back 34

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

Front 35

Why is P=MC?

Back 35

In a perfectly competitive market, price=demand curve. If price is greater than MC, more profits can be made.

Front 36

profit or loss in shortrun =

Back 36

difference between MC and ARC

Front 37

Monopoly

Back 37

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.
MONOPOLIST FACES ENTIRE MARKET DEMAND CURVE

Front 38

Natural monopoly

Back 38

one firm can produce at a lower cost per unit than can two or more firms.

Front 39

profit maximization in monopoly

Back 39

MR=MC, Price >MR
MR=1/2 demand curve

Front 40

TO find price under monopoly

Back 40

plug Q obtained fron MR=MC equations, into the demand equation.

Front 41

The variation from perfect competition is that..

Back 41

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.

Front 42

monopolist's supply curve

Back 42

doesnt have one. Q is where MC=MR.

Front 43

A monopoly has a profit when

Back 43

P>ATC

Front 44

When a monopoly takes over,

Back 44

the old competitive market supply curve becomes the monopoly;s MC curve

Front 45

Rent-seeking activity

Back 45

costly action a firm undertakes to establish or maintain its monopoly status

Front 46

Price discrimination

Back 46

dependent of the elasticity of demand

Front 47

Monopolistic Competition

Back 47

many firms selling products that are differentiated, and in which there is easy entry and exit (elastic demand)
ex. restaurants, movie theaters, gas stations
Assumptions:
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

Front 48

Reason for differentiation

Back 48

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.

Front 49

Monopolistic competition is not technically efficient

Back 49

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.

Front 50

Excess Capacity

Back 50

too many firms producing too little output. differece between production under monopolistic and [erfect competition

Front 51

Nonprice competition

Back 51

any action a firm takes to increase demand for its product- better service, product guarantees, free home delivery

Front 52

Oligopoly

Back 52

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

Front 53

kinked demand curve

Back 53

shows that firms have price stability event if marginal costs change. although there is a discontinuity, MR will remain = MC.

Front 54

Game Theory

Back 54

An approach to modelicng the strategic interaction of oligopolists in terms of moves and coutnermoves

Front 55

Dominant Strategy

Back 55

The strategy that is best for a player no matter what the other player choses

Front 56

Nash Equilibrium

Back 56

each player is taking the best action for herself, given the actions taken by al other players

Front 57

Prisoner's Dilemma

Back 57

how to chose a strategy without knowing the other person's

Front 58

Cartels

Back 58

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.