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126 Cards in this Set
- Front
- Back
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what is the basic activity of a firm
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to use inputs (workers, achinse, and natural resources) to produce outputs (goods/services)
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techonology
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processes a firm uses to turn inputs into outputs
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technological change
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a change in the avility of a firm to produce a given level of output with a give quantity of inputs
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short run
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period of time during which at least one of a firms' inputs is fixed
ex: a lease on a building |
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long run
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period of time in which a firm can vary all its inputs, adopt new technology, change labor, etc
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K, L, t
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K = capital
L = labor t = technology |
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total cost
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the cost of all inputs a firm uses in production
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variable costs
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cost that change as output changes
ex: rent, office supplies, etc |
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fixed costs
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costs that will not change as output changes
ex: rent, insurance, etc |
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TC =
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VC + FC
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opportunity cost
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the highest valued alternative that must be given up in an activity
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implicit costs
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a nonmonetary opportunity cost
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explicit cost
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a cost that involves spending money
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production function
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the relationship between the inputs employed by a firm and the maximum output it can produce with those inputs
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average total cost (ATC)
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TC/Q
OR AFC + AVC |
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what is the shape of ATC
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U shaped
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average fixed cost (AFC)
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FC/Q
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average variable cost (AVC)
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VC/Q
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what is the shape of the AFC graph
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exponential downward slope
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what is the shape of the AVC graph
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U shaped
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marginal product of labor
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the additiona output a firm produces as a result of hiring one more worker
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increases in marginal product of labor result from what?
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division of labor by dividing up tasks among workers
and specialization --> more efficient and quickly |
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law of diminishing returns
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with more variable input at the same amount of fixed input, will cause marginal product of variable input to decline
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shape of a total output/production graph
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s-curve positive, increasing
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shape of a marginal product of labor graph
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s-curve downward
specialization leads to an initial increase but then leads to diminishing returns |
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average product of labor
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TP (or TO)/ Q of workers
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marginal cost
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the change in a firm's total cost from producing one more unit of a good/service
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MC euqation
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Change in TC/ change in Q
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What is the relationship between marginal product of labor and marginal cost
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when marginal production of labor is rising, marginal cost of output falls
when marginal production of labor is decreasing, marginal cost of output increases If you aren't gaining as much for your increased labor, then it is ultimately going to be more costly for you |
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MC intersects the AVC and ATC where?
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at their minimum points
when MC = AVC or ATC they are at their lowest points |
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what happens to AFC as Q increases
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it gets smaller
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what happens to ATC as Q increases
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it increases and becomes closer to AVC because AFC is becoming smaller and negligible.
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do fixed and variable costs apply to long run?
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no because all costs are variable
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long run average cost curve
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a curve showing the lowest cost at which a firm is able to produce a given quantity of output in the long run when no inputs are fixed
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economies of scale
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the situation when a firm's long-run average costs fall as it increases output
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why would a company experience economies of scale?
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If it increasing output, the company may increase its bargaining power with suppliers to get inputs at a lower price, ex: Wal Mart
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constant returns to scale
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the situation when a firm's long-run average costs remain unchanged as it increases output
as a store increases output, it must reciprocally increase input to keep up |
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minimum efficient scale
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the level of output at which all economies of scale are exhausted
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diseconomies of scale
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the situation when a firm's long-run average costs rise as the firm increases output
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perfect competition market structure
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many firms
identical product high ease of entry ex: growing wheat, growing apples |
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monopolistic competition market structure
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many frims
differentiated products high ease of entry ex: clothing stores, resturants |
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oligopoly market structure
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few firms
identical or differentiated products low ease of entry ex: manufacturing computers |
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monopoly market structure
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one firm
one unique product entry is blocked ex: first class mail, tapwater |
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in a perfectly competetive market, what kind of influence does one firm or consumer have?
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none because consumers and firms accept the market price universally if they want to buy and sell in that style of market
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price taker
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buyer or seller that is unable to affect the market price
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what does the demand curve for output look like in a perfectly competitive firm?
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a horizontal line for an individual because they must accept the equilibrium value for the entire market
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Profit =
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TR - TC
total revenue - total cost |
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average revenue
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total revenue divided by the quantity of the product sold
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marginal revenue
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the change in total revenue from selling one more unit of a product
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in a perfectly competitive market, price is equal to
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the average revenue and marginal revenue
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profit is maximixed when
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MC = MR
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a marginal revenue curve is the same as what in a perfectly competitive firm
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the demand curve
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in a perfectly competitive market MC is equal to
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P because MR is equal to P
MC = MR = P at the highest point of profit |
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what is the equation for the profit per unit of good/service
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(P-ATC) X Q
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When P > ATC
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profit
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When P = ATC
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breaks even
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When P < ATC
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loss
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When MPL is decreasing what is happening to MC
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it is increasing because there are more wages for each worker
remeber: when mpl is decreasing it means you are getting less output benefit per worker that you hire |
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why is AVC U shaped
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because of diminishing returns, division of labor and specialization
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where does MC intersect AVC and TC
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at their minimum points
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when MC is less than AVC or ATC what is happening to those curves?
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they are decreasing
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when MC is more than AVC or ATC what is happening to those curves
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they are increasing
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In a perfectly competitive market, demand is equal to what for an individual firm?
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the equilibrium price, which is equal to the mariginal revenue
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Profit equals (TT)
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TR - TC
OR P-ATC * Q |
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marginal revenue
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change TR / change Q
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what two choices does a firm have in the short run when it is experiencing losses
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continue to produce or stop production by temporarily shutting down (still pay fixed costs)
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When P = ATC for a perfectly competitive market, what does that mean for the profit of a company?
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it is zero in the calculations but it means that the company is getting the same rate of return as other companies
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what is the shut down rule for firms?
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when P < AVC --> shut down
when P > AVC --> stay in business in the short run in the long run if P < ATC then shut down |
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shutdown point
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the minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run
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Logic of how an exit affects economic losses
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demand decreases for a product, causing theprice to fall and losses for individuals.
Companies leave the market, shifting the S curve to the left, rising the price, making it so the firms still in the market can break even |
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allocative efficiency
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a state of the economy that reflects consumer preferences
MB to consumer = MC to firms |
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accounting profit
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profit minus explicit costs
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what is important to consider in profit calculations
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consider the implicit costs as well
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monopolistic competition
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many firms
differentiated products no barriers to new firms entering |
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what does the demand curve for a monopolistic competitive firm looklike?
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it is downward sloping
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output effect
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the gain you receive from selling additional quanitities of a good when you change/lower the price
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price effect
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the loss of revenue from the price cut of a good/service
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what is a general rule about monopolistic competitoin
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every firm that has the ability to affect the price of a good will have a marginal revenue curve that is below its demand cuve
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what is the decision rule for monopolistic competetive firms
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to choose Q* where MR = MC
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what happens in the long run for monopolistic competitive firms?
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it goes to zero, but in monop you can postpone that zero to hit later by innovating to reduce ATC
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For monopolistic if ATC is less than demand, what happens to profit?
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positive
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for monopolistic if ATC equals the demand curve what happens?
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0
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for monopolistic if ATC is greater than the demand curve what happens?
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negative
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if in the short run, profits are greater than zero what happens in a monopolistic market
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it will induce an entry of firms, this will shift the demand curve down to where ATC intersects demand, leading to a longer zero profit
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what happens in the the long run for monopolistic firms to the elasticity of the demand curve
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more elastic
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how can monopolistic firms affect the demand curve
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they can differentiate their products more, advertise, change technology, etc
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what are the two important long run differences between monopolistic and perfect competition markets
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monopolistic markets charge a price greater than the marginal cost and monopolistic firms do not produce at the minimum ATC
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Is Monopolistic competition productively efficient
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No because at Q* MB > MC which means that not enough of the good is being made to meet demand
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productive efficiency occurs at what point
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at the minimum of ATC
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for allocative efficiency to hold what must happen
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the price must equal to marginal cost
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how to calculate total revenue
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P x Q
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oligopoly
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few firms
barriers to entry identical or differentiated products |
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concentration ratio
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a measure of the extentn of competition in an industry
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what concentration ratio indicates an oligopoly
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greater than 40%
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economies of scale
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the situation when a firm's long-run average costs fall as it increases output
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what is the most important barrier to entering an oligopoly
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economies of scale
if the LRAC is high for small firms, then the market will gravitate towards large firms. |
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3 barriers to entering an oligopoly
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economies of scale
ownership of key input government imposed barriers |
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ex of ownership of key input
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a key resource is owned by an individual company
ex: ocean spray owns almost all the crop for cranberries |
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ex of government imposed barriers
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patents which give the exclusive right to a product for up to 20 yrs
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game theory
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the study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of decision of firms in idustries where the profits of each firm depend on its interactions with other firms
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3 components of game theory
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rules
strategies payoffs |
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collusion
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an agreement among firms to charge the same price of otherwise not compete
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dominant strategy
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a strategy that is best for a firm no matter what strategies other firms use
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nash equilbrium
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a situation in which each firm chooses the best strategy given the strategies chosen by other firms
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cooperative equilibrium
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an equilibrium in a geam in which players coperate to increase their mutual payoff
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noncooperative equilibrium
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an equilibrium in a geam in which players do not cooperate but pursue their own self-interest
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prisoner's dillemma
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a game in which pursuing the dominant strategies results in noncooperation that leaves everyone worse off.
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explain how darwin is considered to be the founder of economics
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in competition, there will be minute changes that will eventually lead to successes for an individual and for the species. However, some adaptations may be favorable in one instance, but not in another.
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luxury fever
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when the top decide to show their wealth through visible means, and those below them try to emulate it and it keeps creating a bigger and bigger standard for individuals to hold themselves against.
This can be checked by government to help stop the cycle before things get out of control |
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prisoner's dilemma
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a game where nash equilibrium leaves all players worse off
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what is a requirement to the prisoner's dilemma
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that there must be an alternative equilibrium
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price leading
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a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
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cartel
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a group of firms that collude by agreeing to restrict outpuet to increase prices and profits
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what are the five competitive forces that affect the level of competition
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competition from existing firms
threats from potential entrants competition from substitute goods or services bargaining power of buyers bargaining power of suppliers |
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monopolies
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barriers to entry
one firm unique product |
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how do monopolies enter the market
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the gov blocks entry of more than one firm
one firm has control of key resources important network externalities exist in supplying the good or service economics of scale are so large that one firm has a natural monopoly |
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how can entry be blocked by gov action
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patent of copyright
granting a firm public franchise-or exclusive right to be the legal provider of a good/service |
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difference between a copyright and patent
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copyright give exclusive right to produce/sell a creation and it last 70 yrs after creators death
patents are for 20 yrs |
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network externalities
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a situation in which the usefulness of a product increases with the number of consumers who use it
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natural monopoloy
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a situation in which economies of scale are so large that one firm can supply the entire market at a lower average total cost than can two or more firms
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in a monopoly market demand equals
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individual firm demand because it is the market
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decision rule for monopolies
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to produce at MC = MR/MB
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in a monopolistic market, the supply curve is equal to
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the marginal cost curve
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summarize economic efficiency with monopolies
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monopoly causes a reduction in consumer surplus, increase in producer surplus, and incurs a deadweight loss
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what are the long run profits for monopolistic firms
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positive
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market power
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the ability of a firm to charge a price greater than marginal cost
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