41 Cards in this Set
| Front | Back |
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Profit=
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TR (amount a firm receives from output) - TC (market value of the inputs a firm uses in production
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explicit costs
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outlay of money
ex: workers' wages
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implicit costs
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costs other than cash outlay
ex: opportunity cost of owner's time
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accounting profit
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TR- total explicit costs
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economic profit
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TR- TC (explicit+implicit)
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production function
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shows relationship between quantity of inputs used to produce a good and the quantity of output of that good
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marginal product
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increase in output arising from an additional unit of input
MPL (of labor)= Change in Q/ Change in L
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Why does MPL diminish?
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MP of an input declines as Q of input increases (avg worker has less land to work with, etc.)
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Fixed Costs
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do not vary with Q of output
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Variable Costs
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vary with the Q produced
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Total Costs=
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FC+VC
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Marginal Cost=
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Change in TC/ change in Q
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Average fixed cost
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FC/Q
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Average variable cost
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VC/Q
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Average Total Cost
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ATC=TC/Q
ATC= AFC+AVC
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For competitive firm, P also =
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MR=P=AR
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Perfect Competition characteristics
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many buyers/sellers
goods for sale are largely the same
firms can freely enter/exit market
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Revenues of a competitive firm
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TR=PQ
AR= TR/Q =P
MR= change in TR/ change in Q
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MR=P only true for...
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firms in competitive markets
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Profit Maximization
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the level of Q that makes distance between TR and TC the greatest
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slope of TR and TC are the same at..
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the profit maximizing Q
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find profit maximizing Q when
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slope of TR (MR)= slope of TC (MC)
MR=MC
[Price=MC]
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What Q maximizes the firm's profit?
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if MR>MC, increase Q to raise profit
if MR<MC, reduce Q to raise profit
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Competitive markets: MR is always
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horizontal
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shut down if
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TR<VC or P<AVC
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Exit if...
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TR<TC
P<ATC
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Enter market if..
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TR>TC
P>ATC
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long-run equilibrium
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the process of entry/exit complete- remaining firms earn zero economic profit
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zero economic profit occurs when...
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P=ATC
[P=MR=MC=ATC]
in the long run, P=minimum ATC
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Monopoly
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sole seller of a product without close substitutes
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difference between monopoly and perfect competition
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monopoly has market power: ability to influence market price of the product it sells
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barriers to entry in monopolies
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single firm owns a key resource
government gives single firm the exclusive right to produce good
natural monopoly- single firm can produce entire market Q at lower cost than could several firms
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Demand Curves: Monopoly vs. Competition
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Competition: indv. firms- horizontal at P=MR
Monopoly: only seller, MR does not =P, faces market demand curve
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Increasing Q has 2 effects on revenue:
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Output effect- higher output raises revenue
Price effect- lower price reduces revenue
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oligopoly
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market with few sellers
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game theory
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study of how people behave in strategic situations (oligopoly)
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collusion
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agreement among firms in a market about Q to produce or P to charge
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Cartel
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group of firms acting in unison
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nash equilibrium
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a situation in which economic participants interacting with one another each choose their best strategy given the strategies that all others have chosen
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oligopoly market P&Q comparisons
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Q: monopoly<oligopoly<competitive
P: competitive<oligopoly<monopoly
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game theory
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rests on players choosing dominant strategy for themselves
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Eco 2030 Exam 1