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145 Cards in this Set
- Front
- Back
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the firm's goal |
to maximize profit |
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accountants measure _______ and _______ using accounting conventions in order to ensure that the firm pays the proper amount of tax and to give creditors information |
revenue and cost |
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costs as measured by accountants are a firm's ________________________ |
opportunity cost |
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______ ______ is a cost paid in money
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explicit cost |
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The decisions the firm makes to maximize it's profit responds to ____________ and ________________ |
opportunity cost and economic profit |
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the _______________ of a firm's use of resources is the highest- valued alternative forgone |
opportunity cost
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opportunity costs include both ___________ and ____________ costs |
explicit and implicit |
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________ is an opportunity cost incurred by a firm when it uses a factor of production for which it does not make a direct money payment |
implicit cost |
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the return to entrepreneurship |
normal profit |
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the __________ is part of a firm's opportunity cost because it is the cost of persuading the entrepreneur of not running another business |
normal profit |
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the firms total revenue minus it's total opportunity cost |
economic profit |
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a profit over and above the normal profit |
economic profit |
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a firm owner's decisions can be categorized as _____ decisions and ______ decisions |
short run and long run |
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a time frame in which the quantities of some resources are fixed |
short run |
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factors of fixed resources including the firm's management organization structure, level of technology, buildings and large equipment are called the firm's ___________ |
plant |
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the time frame in which the quantities of all resources can be varied. these decisions are not easily reversed so usually a firm must live with the plant size that it has created for some time |
long run |
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to increase it's output in the short run, a firm must increase the _______________ |
quantity of labor employed |
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there are ___ relationships between the quantity of labor and the firm's output |
3 |
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the _______ __________ is the total quantity of a good produced in a given period |
total product |
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the _______ ______ of labor is the increase in total product that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same |
marginal product (MP) |
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the __________ _________ curve shows the additional output generated by each additional unit of labor. |
marginal product curve |
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the __________ ____________ curve is typically an upside-down u shape |
Marginal product |
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______________ marginal returns occurs when the marginal product of an additional worker exceeds the marginal product of the previous worker |
increasing |
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the marginal product curve has a __________ slope |
positive |
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at low levels of employment, ____________ marginal returns is likely because hiring an additional worker allows large gains from specialization |
increasing |
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_____________ marginal returns occur when the marginal product of an additional worker is less than the marginal product of the previous worker |
decreasing |
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the __________________________ states that as a firm uses more of a variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes |
law of decreasing returns |
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the _______ _______ ______ shows the average product that is generated by labor at each level of labor |
average product curve |
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the ___________ ______ __________ has an upside-down u shape |
average product curve |
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when the marginal product of labor exceeds the average product of labor, the average product of labor _____________ |
increases |
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____ _____ is the cost of all the factors of production a firm uses |
total cost |
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__________ ___________ ____________ is the cots of the firm's fixed factors of production (land, capital, entrepreneurship) |
total fixed cost |
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______________ ________ _________ is the cost of the firm's variable inputs -- the cost of labor |
total variable cost |
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TC = |
TFC + TVC |
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the increase in total cost that results from a one-unit increase in output |
marginal cost |
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total fixed cost per unit of output. this value falls has output increases |
average fixed cost |
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total variable costs per unit of output |
average variable cost |
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at low levels of output, AVC ______ as output increases but at higher levels of output, AVC ______ as output increases |
falls rises |
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the total cost per unit of output |
average total cost |
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at low levels of output, ATC ____ as output increases but a higher levels of output, ATC ____ as output increases |
falls rises |
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these three curves are all u shaped |
MC AVC ATC |
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the vertical distance between the AVC curve and the ATC curve is the |
AFC |
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the MC curve intersects the AVC curve and ATC curve at their |
minimums |
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the shape of the cost curves is related to the shape of the __________ curves |
productivity |
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the shape of the AVC curve is determined by the shape of the ___ curve |
AP |
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over the range of output for which the AP curve is rising, the AVC curve is ______. and over the range of output for which the AP curve is falling, the AVC curve is _______. |
falling rising |
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the shape of the MC curve is determined by the shape of the ___ curve |
MP |
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over the range of output for which the MP curve is rising, the MC curve is _______ and over the range of output for which the MP curve is falling, the MC curve is ______ |
falling rising |
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the cost curves shift with changes in _________ or changes in resource ________ |
technology prices
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a fall in the price of the ____________ factor of production shifts the AFC and ATC curves downward but leaves the AVC and MC curves unchanged |
fixed |
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a fall in the price of a_________ factor of production shifts the AVC, ATC, and MC curves downward but leaves the AFC curve unchanged |
variable |
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in the long run, all costs are _____ costs |
variable |
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features of a firm's technology that make average total cost fall as output increases |
economies of sale |
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the main source of economies of scale is greater specialization of both ____ and _____ |
labor and capital |
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features of a firms technology that make average total cost rise as output increases |
diseconomies of scale |
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arise from the difficulty of coordinating and controlling a large business |
diseconomies of scale |
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features of a firm's technology that keep average total cost constant as output increases |
constant returns to scale |
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occur when a firm is able to replicate its existing production facility including its management system |
constant returns to scale |
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In the long run, a firm can use _________ _______ ___________ |
different plant sizes |
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in the long run, each plant size has a different short run ___ curve |
ATC |
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Each short-run ___ curve is U shaped and the larger the plant size, the greater the output at which the ATC is a _________ |
ATC minimum |
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the curve that shows the lowest average total cost at which it is possible to produce each output when the firm has sufficient time to change both its plant size and labor employed |
long run average cost curve |
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this curve is derived from the short run average total cost curves |
long run average cost curve |
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shows the lowest average total cost to produce a given level of output. |
LRAC curve |
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the LRAC slopes _________ when the firm has economies of scale, is ___________ when the firm has constant returns to scale, and slopes ______ when the firm has diseconomies of scale |
downward horizontal upward |
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______________ exists when - many firms sell identical products to many buyers - there are no restrictions on entry into the industry - established firms have no advantage over existing ones - sellers and buyers are well informed about prices |
perfect competition |
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a market for a good or service that has no close substitutes and in which there is one supplier that is protected from competition by a barrier preventing the entry of new firms |
monopoly |
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a market in which a number of firms compete by making similar but slightly different products |
monopolistic competition |
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a market in which a small number of firms compete |
oligopoly |
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difference between total revenue and total cost of production |
economic profit |
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a firm that cannot influence the market price and so it sets its own price equal to the market price |
price takers |
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the change in total revenue that results in a one unit increase in the quantity sold |
marginal revenue |
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because the firm is a price taker, its marginal revenue is equal to the _____ _________ and remains constant as output sold _______ |
market price increases |
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because the firm is a price taker, the firm's demand is ______ ___________ and the firm's demand curve is a ___________ line at the market price |
perfectly elastic horizontal |
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the firm produces the quantity of output for which the difference between total revenue and total cost is at its maximum because this difference is its _____ _______-- |
economic profit |
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____ _____ can be used to determine the profit maximizing quantity |
marginal analysis |
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as output rises, MR is constant, but MC eventually ______ |
increases |
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If the firm stops production temporarily, it earns no revenue but there are no variable costs. Fixed costs constitute the only losses so the total economic loss equals the fixed cost |
loss when shut down` |
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if the firm stops production temporarily, it earns no revenue but there are no ________ costs. fixed costs constitute the only losses so the total __________ ____ equals the ______ cost |
variable economic loss fixed |
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If the firm carries on producing, it incurs both fixed and variable costs while gaining some revenue |
loss when producing |
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the ___________ ____ is revenue minus the sum of total fixed cost plus total variable cost |
economic loss |
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if total revenue is greater than variable cost, the firm's total economic loss is ________ than its fixed costs, so the firm stays open |
less |
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if total revenue is less than total variable costs, the firm's economic losses are _______ than total fixed costs so the firm closes |
greater |
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If total revenue is less than variable costs, then P _ AVC in this case the firm shuts down temporarily, thus limiting its losses to total fixed costs |
> |
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if total revenue equals variable costs, then P _ AVC in this case, the firm is indifferent between shutting down temporarily or carrying on, because in either case the economic loss will equal fixed costs |
= |
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the minimum ___ is the lowest price at which the firm will operate because if it operated with a lower price, the firm's loss would be greater than if it shut down. |
AVC |
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the loss when the firm shuts down is equal to its ______ cost |
fixed |
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as long as the firm remains open, it produces where __ = __ |
MR=MC |
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at prices below the minimum AVC, the firm __________ ________ and supplies ____ |
shuts down 0 |
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SHORT-RUN EQUILIBRIUM IN NORMAL TIMES
in normal times, firms make _____ economic profit |
zerooooo |
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three possible profit outcomes with short run equilibrium in good times |
economic profit, zero economic profit, and an economic loss |
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if the price exceeds the ATC in short run equilibrium in good times, the firm makes an ______ ________ |
economic profit |
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if the price is less than the ATC, the firm incurs an __________ _____ in short run equilibrium in bad times |
economic loss |
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profit in the long run |
zero |
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changes in ________ _______ influence the output and the entry or exit decisions made by firms |
market demand |
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when demand for a good ___________, in the short run the existing firms in an industry make an economic profit |
increases |
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Economic profit leads other firms to enter the industry to make economic profit. This makes supply increase and price decrease. Entry continues until in the long run the firms make ____ economic profit |
zero |
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is perfect competition efficient |
yes, because MB = MC |
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is perfect competition fair |
yes in the long run because it allows anyone to enter the market and brings maximum benefits for consumers |
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monopoly has two key features: |
no close substitutes barriers to entry |
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legal or natural constraints that protect a firm from potential competition are called |
barriers to entry |
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natural barriers create a _______ monopoly |
natural monopoly |
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an industry in which one firm can supply the entire market at a lower price than two or more firms can |
natural monopoly |
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when one firm owns all or most of a natural resource, it creates an __________ barrier to entry |
ownership |
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a market in which competition and entry are restricted by the granting of a public franchise, a government license, a patent, or a copyright |
legal monopoly |
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an exclusive right is granted to a firm to supply a good or service --- us postal service |
public franchise |
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when the government controls entry into particular occupations, professions and industries --a license is required to practice law |
government license |
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an exclusive right granted to the inventor of a product or service |
a patent |
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exclusive right granted to the author or composer of a literary, musical, dramatic, or artistic work |
copyright |
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a firm that must sell each unit of its output for the same price to all its costumers |
single price monopoly |
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the practice of selling different units of a good or service for different prices |
price discrimination |
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TR = |
price x quantity sold |
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change in total revenue resulting from a one-unit increase in the quantity sold |
MR |
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a key feature of single price monopoly is that MR |
below |
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when demand is inelastic, fall in price _______ total revenue |
decreases |
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To maximize its profit, a monopoly produces the level of output where __ =__ |
MR = MC |
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the monopoly uses its demand curve to set the price at the _____________ possible rice for which it will be able to sell the quantity it produces |
maximum |
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the monopoly makes an economic profit is P _ ATC |
> |
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In the long run, a monopoly ___ make the economic profit, but in the short run and/or long run, it might make _______ economic profit
or in the short run, it might incur an ____________ ____ |
can 0 economic loss |
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market demand curve in __________ ____________ is the same demand curve that the firm faces in monopoly |
perfect competition |
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the market supply curve in __________ ___________ is the horizontal sum of the individual firm's marginal cost curve |
perfect competition |
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the monopoly produces where MR = MC and sets its price using its ________ curve |
demand |
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compared to a perfectly competitive industry, a single-price monopoly produces ____ output and sets a _______ price |
less higher |
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is monopoly efficient? |
no, even though it benefits its owners because it makes economic profit, it creates deadweight loss |
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is monopoly fair? |
if everyone is free to acquire the monopoly yes |
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the social cost of monopoly might exceed the deadweight loss it creates because of ____ ________ |
rent seeking |
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any attempt to capture consumer surplus, producer surplus, or economic profit |
rent seeking |
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______ ____________ can occur when someone uses resources seeking the opportunity to buy a monopoly for a price less than the monopoly's economic profit. it can also occur when someone uses resources lobbying the government to restrict the competition faced by the lobbyist |
rent seeking |
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the resources used up in rent seeking are a cost to society that adds to the monopoly's _______ ___ |
deadweight loss |
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a person can become the owner of a monopoly in two ways: |
buy a monopoly create a monopoly by rent seeking |
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competition to buy a monopoly will drive up the price to the point at which they make _______ economic profit |
zero |
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competition among rent seekers pushes up the cost of rent seeking until it leaves the monopoly making zero economic profit after paying rent seeking cost. |
rent seeking equilibrium |
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rent seeking leaves consumer surplus unaffected but converts producer surplus into ___________ ____ |
deadweight loss |
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the practice of selling different units of a good or service for different prices |
price discrimination |
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price discrimination converts consumer surplus into ___________ ________ |
economic profit |
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this occurs when a firm is able to sell each unit of output for the highest price that consumers are willing to pay for each unit |
perfect price discrimination |
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in a perfect price discrimination, deadweight loss is ____________ |
eliminated |
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_________ _________ __________ of regulation is that the political and regulatory process relentlessly seeks out inefficiency and introduces regulation that eliminates deadweight loss and allocates resources efficiently |
social interest theory |
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________ _______ of regulation is that the political and regulatory process gets captured by the regulated firm and ends up serving its self-interest, with maximum economic profit, underproduction, and deadweight loss |
capture theory |
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a ___________ ____ _________ ____ sets price equal to marginal cost |
marginal cost pricing rule |
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can be used to make a direct payment to the firm equal to its economic loss, though the government must use a tax to raise the revenue to pay this |
government subsidy |
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an ___________ ______ _____________ ______ sets price equal to average total cost |
average cost pricing rule |
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regulation that sets the price at a level that allows the regulated firm to make a specified target percent return on its capital |
rate of return regulation |
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a regulation that specifies the highest price that a firm is permitted to set - a price ceiling |
price cap regulation |
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typically price cap regulation requires _________ _______ ______, under which profits that rise above a target level must be shared with the firm's customers |
earnings sharing regulation |
