Economics 300 Exam 2
Terms in this set (71)
Perfect elastic demand curve
price elasticity changes
along a staright-line demand curve
if the percentage change in quantity demanded of a good increases by less than the percentage change in the change in the price of the good,
then the demand for the good is inelastic
a price increase of a good will result in
an increase in total revenue when demand for the good is inelastic
a decrease in price causes an increase in
total revenue when demand is elastic
Along the elastic range of a demand curve, price changes cause
total revenue to change in the opposite direction.
A vertical demand curve is
The higher the absolute value of the elasticity of demand coefficient
the greater is the elasticity of demand.
Economists focus on
the absolute value of the coefficient of elasticity of demand
elasticity refers to
Governments examine elasticity of demand to estimate
how changes in excise tax rates affect their tax revenues.
Elasticity of demand becomes
greater over time
The fewer the number of substitutes for a good
, the lower is its elasticity of demand.
A normal profit refers to
a zero economic profit.
In the long run, all costs are
Marginal product rises when
marginal cost falls
A firm's average fixed cost curve is never
One measures an implicit cost through the
application of the opportunity cost principle
The law of diminishing returns implies that the marginal product of the variable input will eventually fall
in the short run
The point of inflection on the TVC curve corresponds to
the minimum point on the MC curve.
There are no fixed costs in
the long run
Economies of scale are present over the range of output where
the LRAC curve is falling
Dis-economies of scale are mainly caused by
the difficulties inherent in managing a large eneterprise
A Competetive firm will sell nothing at prices
above the market price.
A firm can increase its profits by
increasing its output beyond one at which MR>MC.
A competitive firm's short run supply curve is
its marginal cost curve above its AVC curve
A perfectly Competitive firm may have any one of three
possible long run supply curves
Perfect competition is characterized by
many small sellers, a homogeneous or identical product and freedom of entry of entry or exit.
In Competition ,P=
MR for each firm.
To maximize profit, a competitive firm must sell where
In long-run equilibrium, the competitive firm has no incentive to change
output, plant size, or enter or leave the industry.
In long-run equilibrium, a competitive firm produces
where short-run and long-run AC are minimized.
A permanent increase in the demand for the product of a competitive firm will lead to
new entry and temporarily higher profits.
In long-run equilibrium for a competitive industry, firms make
normal profits (zero economic profits).
Price Elasticity of demand
is a measure of the responsiveness of the quantity demanded to a change in price
occurs when there is a change of more than 1 percent in quantity demanded in response to a 1 percent change in price.
E d > 1
Total revenue (TR)
the total number of dollars a firm earns from the sale of a good or service, which is equal to its price multiplied by the quantity demanded
occurs when there is a change of less than 1 percent in quantity demanded in response to a 1 % change in price.
E d < 1
unitary elastic demand
Occurs when there is a 1 percent change in quantity demanded in response to a 1% change in price
E d= 1
perfectly elastic demand
occurs when the quantity demanded declines to zero for even the slightest rise or fall in price.
E d = infinity
perfectly inelastic demand
occurs when the quantity demanded does not change in response to price changes.
E d= 0
Payments to non-owners of a firm for their resources
the opportunity cost of forgone returns to resources owned by a firm
is equal to Total Revenue minus both Explicit and Implicit cost.
the minimum profit necessary to keep a firm in operation
Any resources for which the quantity cannot change during the period of time under consideration
any resources for which the quantity can change during the period of time under consideration
short run (SR)
a period of time so short that there is at least one fixed input
long run (LR)
A period of time so long that all inputs are variable
the relationship b/w the maximum amounts of output that a firm can produce and various quantities of inputs.
the change on total output produced by adding one unit of a variable input, w/ all other inputs used being held constant
Law of diminishing returns
the principle that beyond some point the marginal product decreases as additional units of a variable factor are added to a fixed factor .
Total Fixed Cost (TFC)
Cost that do not vary as output varies and that must be paid even if output is zero.
Total Variable Cost (TVC)
Cost that are zero when output is zero and vary as output is varies
Total Cost (TC)
the sum of total fixed cost and total variable cost at each level of output.
TC = TFC + TVC
Average Fixed Cost (AFC)
total fixed cost divided by the quantity of output produced.
Average Variable Cost (AVC)
total variable cost divided by the quantity of output produced.
Average Total Cost (ATC)
Total cost divided by the quantity of output produced.
ATC= AFC + AVC
Marginal Cost (MC)
The change in total cost when one additional unit of output is produced
MC= change in TC/ change in Q
Long Run Average Cost Curve (LRAC)
The curve that traces the lower cost per unit at which a firm can produce any level of output when the firm can build any desired plant size. (firm's planning curve)
Economies of Scale
A situation in which the long run average cost curve declines as the firm increases output.
Constant Returns to scale
A situation in which the long run average cost curve does not change as the firm increase output.
Dis-economies of scale
situation in which the long run average cost curve rises as the firm increases output.
Consist of 3 market characteristics: (1) the number of sellers, (2) the nature of the product, and (3) the ease of entry into or exit from the market.
is a market structure in which an individual firm cannot affect the price of the product it produces .
Barrier to entry
Any obstacle that makes it difficult for a new firm to enter a market.
A seller that has no control over the price of the product it sells
Marginal Revenue (MR)
The change in total revenue from the sale of one additional unit of output.
MR = change in total revenue / change in output
Perfectly Competitive firm's SR supply curve
the firm's marginal cost curve above the minimum point on its average variable cost curve
Perfectly Competitive Industry's SR supply curve
the supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm's average variable cost curve.