ECON 0100: Exam 2
42 Cards in this Set
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Making Decisions
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Economists model decision making by viewing the full costs and
benefits associated with choices that individuals and firms face. Since many
decisions are of the “how much” variety, the principle of marginal analysis is used to
develop the model.
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Production Theory
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A firm’s production function underlies its cost structure. A first
step in building a model of firm behavior is to investigate the relationship between
the quantity of inputs a firm uses and the quantity of output it produces.
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Cost Theory
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Cost to a firm is the value of the factors of production used in producing
output, so there is a direct relationship between a firm’s production function and its
costs.
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Decision-Making Time Horizons
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A model of firm behavior is made more manageable
by categorizing the decisions firms make into two types: how to best employ existing
plant and equipment (short-run decisions) and what new plant and equipment and
production processes to select (long-run decisions).
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Explicit Costs
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Monetary cost to the firm of acquiring inputs ( Ex: wages, interest on loans, price of materials, utility costs)
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Implicit Costs
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Doesn't require an outlay of money ~ non monetary opportunity costs
eg. the opportunity cost of the owners time
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Economic Profit
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Total revenue minus all costs of production, Explicit and Implicit. (TR-Costs). Usually less than Accounting profit.
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Accounting Profit
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Equal to Revenue minus Explicit Costs (TR-Explicit Costs)
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Marginal Decisions and Marginal Analysis
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Decisions about whether to do a bit more or a bit less of an activity are marginal decisions. The study of such decisions is known as marginal analysis
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production function
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the relationship between quantity of inputs used to make a good and quantity of output of that good
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total costs
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equals the sum of fixed costs and variable costs
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fixed costs
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costs that do not vary with the amount sold
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variable costs
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costs that change according to the level of production
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Average Costs
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the total cost to produce a quantity divided by the quantity produced
(Total Cost/Quantity)
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Marginal Costs
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The variable cost for one more unit of output. Change in total costs due to a one-unit change in production rate.
ex. cost of adding one more class
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The long run average total cost
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Shows the relationship between output and average total cost when fixed cost has been chosen to minimize average total cost at any level of output
- lowest possible short-run average total cost
- long-run average total cost curve is therefore the lower envelope of all short-run average …
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Short Run Average Total Cost
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Is u-shaped because of diminishing marginal product.
(Total costs / # of units produced)
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Opportunity Cost
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The most desirable alternative given up when making a decision.
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returns to scale
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graph example:
IRTS (increasing returns to scale)= ATC goes down as Q goes up
CRTS (constant "")= ATC doesn't change as Q goes up
DRTS (Decrease "")= ATC goes up as Q goes up
Measure the percentage change in output resulting from a given percentage change in inputs
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Market Structure
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A central hypothesis of industrial organization economics is that
firm behavior and performance will be affected by the characteristics of the market
in which a firm operates. The number of sellers and buyers and the nature of the
product are the most significant dimensions of market s…
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Firm Behavior in a Perfectly Competitive Market
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This model expands our
understanding of competitive markets as we find that the market supply curve is
tightly linked to the firms’ costs of production.
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perfect competition
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market in which there are many buyers & sellers, all firms sell identical products, and there are no barriers to entry.
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price takers
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a perfectly competitive market that takes the price it is given by the intersection of the market demand and market supply curves
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Marginal Revenue
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the change in total revenue from selling one additional unit
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Short-Run Equilibrium
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Market demand and market supply determine the market price and quantity bought and sold.
- In the ___ ____, profit can be -Positive, -Negative, -Zero
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Dynamics of Competitive Markets
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The model predicts the impact on the market
price and output in both the short-run and the long run due to changes in demand,
technology, and factor costs
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Firm Behavior in an Imperfectly Competitive Market
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A new model of firm behavior
based on a market with characteristics that differ from a perfectly competitive
market.
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Monopoly
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At the opposite end of the spectrum from a firm in a perfectly competitive
market, a ____ firm is a single seller in a well-defined market. Although difficult
to identify in the real world, several markets closely approximate ______ markets
and ______ analysis explains observed busines…
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Government Policies
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Market structures that reduce the economic well-being of
consumers and economic efficiency are often subject to government regulation.
Antitrust policies are used to prevent the accumulation and use of market power
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Short run supply curve vs. Long run supply curve
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- short run - constant slope upward
- long run - horizontal line at P = minimum ATC
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Efficiency
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description of a market or economy that takes all opportunities to make some people better off without making other people worse off
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monopoly
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a firm that is the sole seller of a product without close substitutes
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Natural Monopoly
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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. Can arise when fixed costs to operate are very high.
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Market Power
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The ability to raise prices above the level that perfect competition would produce, but restricting the quantity supplied
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Barrier to Entry
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obstacles that make it difficult for new companies to enter a market
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price discrimination
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selling products to different people and groups based on their willingness to pay.
Ex. Plane Tickets. (Cheaper to buy earlier, more costly to buy later)
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Monopolistic Competition
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This is a hybrid of monopoly and competition. Like
monopoly, each firm faces a downward-sloping demand curve and charges a price
above marginal cost. As in competition, there are many firms and entry and exit drive
the profit of each firm toward zero.
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Market Outcome Comparison
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The economic well-being of market participants and the
efficiency of the market outcome for monopolistic competition are compared to the
benchmark case of perfect competition.
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Differentiated products
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The somewhat different products (such as automobiles, cigarettes, and soaps) produced by different manufacturers in the same industry or general product group.
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imperfect competition
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Any markets or industries that do not match the criteria for perfect competition.
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Cartel
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a group of firms that act together like a monopoly
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Collusion
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A secret pact between firms to gain something illegally
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ECON 0100: Monopoly