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Terms in this set (53)
Perfectly competitive market
All producers are price-taking producers and all consumers are price-taking consumers- no one's actions can influence the market price(marginal revenue). Consumers are normally price-takers, but producers often are not. In a perfectly competitive industry, all producers are price-takers.
2 necessary conditions for a perfectly competitive industry
there are many producers, none of whom have a large market share, and the industry produces a standardized product or commodity- goods that consumers regard as equivalent. A third condition is often satisfied as well: free entry and exit into and from the industry.
A good or service is the additional benefit derived from producing one more unit of that good or service.
The principle of marginal analysis
says that the optimal amount of an activity is the level at which marginal benefit equals marginal cost.
A producer chooses output according to the...
Optimal output rule: produce the quantity at which marginal revenue(market price) equals marginal cost.
marginal revenue is equal to price and its marginal revenue curve
is a horizontal line at the market price.
the price-taking firm's optimal output rule:
Produce that quantity at which price equals marginal cost. However, a firm that produces the optimal quantity may not be profitable.
Considerably larger than the economic profit because it includes only explicit costs and depreciation, not implicit costs.
When is a firm profitable?
A firm is profitable if total revenue exceeds total cost or, equivalently, if the market price exceeds its
break even price
the minimum average total cost. If market price exceeds the break-even price, the firm is profitable, if it is less, the firm is unprofitable; if it is equal, the firm breaks even. When profitable, the firm's per unit profit is P - ATC; when unprofitable, its per-unit loss is ATC-P
Is irrelevant to the firm's optimal short-run production decision, which depends on its shut-down price
its minimum average variable cost- and the market price. The decision to ignore fixed costs is similar to the decision to ignore sunk costs, nonrecoverable costs that have already been incurred. When the market price falls below the shut-down price, the firm ceases production in the short run. This generates the firm's...
short-run individual supply curve-
Perfectly competitive market:
A market in which all market participants both producers and consumers are price-takers.
Perfectly competitive industry:
An industry in which producers are price-takers.
Is the fraction of the total industry output accounted for by that Producer's output.
A good or service is the additional benefit derived from producing one more unit of that good or service.
Principal of marginal analysis:
The optimal amount of an activity is the quantity at which marginal benefit equals marginal cost.
The change in total revenue generated by an additional unit of output. This is simply the market price.
Optimal output rule
profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to it marginal cost.
Price-taking firm's optimal output rule:
A price-taking firm's profit is maximized by producing the quality of output at which the market price is equal to the marginal cost of the last unit produce .
Marginal Revenue equation:
Change in total revenue/ Change in quantity of output
Marginal revenue curve:
Shows how marginal revenue varies as output varies.
is equal to revenue minus the opportunity cost of resources used. The firm's revenue minus the opportunity cost of its resources.
Like the Lebron James example.
Incorporates explicit cost and implicit cost.
A cost that requires an outlay of money.
Does not require an outlay of money; in dollar terms, of benefits that are forgone.
Equal to revenue minus explicit cost. It is usually larger than economic profit.
Shut down price:
Equal to the minimum average variable cost, and when this happens a firm will cease production in the short run if the market price falls below the minimum average VC.
A cost that has already been incurred and is nonrecoverable. A sunk cost should be ignored in decisions about future actions.
Difference between Long run and Short run?
Short run: Quantity of labor is variable but quantity of capital and production processes are fixed (i.e. taken as given)
Long run: Quantity of labor, quantity of capital, and production processes are all variable (i.e. changeable)
Average Total Cost
The average cost its total cost divided by the quantity of output produced, that is, it is equal to total cost per unit of output.
How to calculate?
Total Cost/Quantity of output
So like it costs 900/and the quantity of output you get is 95 bushels of wheat.
This graph is u-shaped...Because the short run Marginal cost curve is sloped like this, mathematically the average cost curve will be U shaped. Initially average costs fall. But, when marginal cost is above the average cost, then average cost starts to rise.
Diminishing returns effect
The larger the output, the greater the amount of variable input required to produce additional units, leading to higher average variable cost.
Minimum average total cost
The point m in the book which represents the lowest point(lowest cost to produce and still get profit) Average total cost and marginal costs intersect here.
law of diminishing returns
As you add additional workers and you add it to fixed resources it eventually proves to be negative.
As you add more inputs the additional output eventually starts to fall.
How to calculate Average Fixed Cost?
FC/Q ---- fixed cost/quantity
How to calculate Average Variable Cost?
VC/Q ------ Variable cost/Quantity of output
How to calculate Average Total Cost
TC/Q -------- Total Cost/Quantity of output
How to calculate Marginal Cost
Change in TC/Change in Quantity
so... Change in total cost/Change in quantity of output
How to calculate total cost
TC = FC + VC
Total cost = fixed cost + variable cost
Average total cost
U-shaped average total cost curves are typical, because average total cost consists of two parts: average fixed cost, which falls when output increases(the spreading effect), and average variable cost, which rises with output(the diminishing returns effect).
The bottom of the U is is the level of output at which average total cost is minimized. (minimum-cost output).
As output increases...
There are increasing returns to scale if long-run average total cost declines. The more staplers you get and paper...fixed cost and you add workers you should be able to make more money.
What the graphs look like
Walking through Handout that will be similar to quiz.
Equation: TC = 100 + 2Q + 4Q^2
What is the total fixed cost? What is the total variable cost?
The fixed cost is 100, what you will pay outright. Does not have a Q attached to it.
Variable cost has a Q attached to it. The costs associated with producing additional goods.
What is the total cost when the output Q = 4?
Use calculator to plug 4 in for Q.
You get 172.
When you draw TC on the Cost-Output plane where cost is the vertical axis and Quantity is the horizontal axis... you can just plug quadratic into your TI-84 plus
To find average cost when Q = 4
We figured out that the cost of producing 4 units is 172 so to find the average cost we take 172/4 and get 43.
Using the graph, find the level of output that minimizes the AC. What is the value of AC at that output. In this case we can use our calculator to see what Q gives us lowest AC. Or we can go through and plug in Quantities. In this case, the best option is 5 in which the AC is 42. You produce where MC=AC... this is the break even price where slope is 0.
Then asks what is marginal cost when Q = 4. Marginal cost is change in total cost/change in quantity
So the marginal cost is 30.... (172-142)/1 = 30
At Q = 4 the marginal cost is 38 which is less than the AC so this tells us that the AC is still falling.
Calculating the MC when the output is equal to the level that minimizes the AC that you found earlier.
MC will equal AC... where AC is minimized.
At Q = 6 the marginal cost is greater than the AC, and this tells us that the AC is rising.
In terms of drawing AC and MC curve on a cost output plane, AC will be a U shape and MC will be a linear line with a slope of 8. They will intersect where AC slope = 0. The flat part of the U of AC is where they intersect.
The minimum price of salt Great Neck needs to get to operate without losing money or to "break even" is $42. Where Q = 5 and TC = 210. 210/5 = 42.
quantity of goods sold by the price of the goods.
Economies of Scale
Where Average Cost is falling and Marginal Cost is lower than Average Cost
Constant Returns to Scale
In the long run Marginal Cost is equal to Average Cost.
Slope = 0
Diseconomies of Scale
As more output is added... cost increases... average cost increases and marginal cost is now higher than average cost.
the minimum efficient scale is defined as the lowest production point at which long-run total average costs (LRATC) are minimized.
Diminishing Marginal Product
Only a thing in the short run... no such thing as scale in the short run only in the long run when costs are all variable.
Sometimes referred to as variable factor proportions, law of diminishing returns states that as equal quantities of one variable factor are increased, while other factor inputs remain constant, a point is reached beyond which the addition of one more unit of the variable factor will result in a diminishing rate of return and the marginal physical product will fall.
Short run and Long run
In the short run, at least one factor of production is fixed.
This means that output can be increased by adding more variable factors such as employing more workers and buying in more raw materials
The long run is when you can increase both the fixed and variable costs... everything changes nothing is fixed.
Long run no fixed costs
Short run fixed costs and variable costs.
So in short run you can have diminishing returns and in the long run you can have economies to scale.
How demand and supply react to taxation.... is it imposed on the consumer or the producer:
Consumer and Producer Surplus
Individual consumer surplus: willingness to pay - market price
Total Consumer Surplus: The sum of all individual CS or The area Below demand curve ABOVE market price.
Sellers want to maximize selling price and set a minimum pice at which they enter The market - their "cost" -financial AND opportunity costs
Individual Producer Surplus:
Producer surplus is a measure of producer welfare. It is measured as the difference between what producers are willing and able to supply a good for and the price they actually receive. Producer surplus.
Individual Producer Surplus: market- "cost"
Total Producer Surplus: Area above the supply curve BELOW the market price
, Total Surplus is maximized as any other price would not benefit both consumers And producers.
Thus, this market is EFFICIENT. Resources have been allocated efficiently for consumers and producers.
Is the Equilibrium fair or equitable?
How can you define an equitable distribution of the good... so this question is tough.
Government sets the price. Government creates the price control so society can operate.
Government says that P* equilibrium is too high they can change it up.
Long run/short run:
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