Micro chapter 6


Terms in this set (...)

redemption price
profit = TR - TC

profit = (PxQ) - (ATCxQ)

profit = TR - VC - FC
perfectly competitive market
a market in which no individual supplier has significant influence on the market price of he product
price taker
a term that has no influence over the price at which it sells its product
four characteristics of markets that are perfectly competitive
1) homogenous product (standardized)
2) the market has many buyers and sellers
3) productive resources are mobile (freedom of entry and exit to and from the market)
4) buyers and sellers are well informed
The demand curve of a perfectly competitive firm is
a horizontal line at market price
short run
a period of time sufficiently short that at least some of the firm's factors of production are fixed
long run
a period of time of sufficient length that all the firm's factors of production are variable
law of diminishing returns
the principle that, at some point, adding more of a variable input to the same amount of a fixed input will cause the marginal product of the variable input to decline
fixed factor of production
an input whose quantity cannot be altered in the short run
variable factor of production
an input whose quantity can be altered in the short run
fixed cost =
price when Q=0
variable cost =
total cost - fixed cost
average total cost =
total cost/quantity of output
average total cost x quantity =
total cost
*******marginal cost
change in total cost/change in quantity output
when trying to maximize profit, you need to think in terms of
MARGINAL cost and MARGINAL benefit

marginal cost cannot exceed marginal benefit
the increase in the price of a product causes an _____ in the profit-maximizing level of output
a decrease in the wage rate leads to a ____ in marginal cost, which also causes an ____ in the profit-maximizing level of output
decrease; increase
T/F: changing fixed cost changes the profit-maximizing level of output
short-run shutdown condition
Total revenue < VC
(P x Q) < VC
P < minimum value of AVC
AVC (Average Variable Cost)
VC/Q total output
ATC (Average Total Cost)
TC/Q total output
profitable firm
a firm whose total revenue exceeds its total cost

(PxQ) > TC
(PxQ) > (ATC x Q)
maximum profit is when
P = MC
If P > MC, the firm can increase its profit by__________. If P < MC, the firm can increase its profit by ________.
expanding production and sales; producing and selling less output
measuring profit graphically
(P - ATC) x Q
measuring negative profit graphically
when P < ATC at the profit-maximizing quantity, the firm experiences a loss
maximizing profits strategy
Will changing fixed cost change the marginal cost?
no; a change in fixed costs will only change total costs and average costs. Marginal cost is affected only by changes in variable costs
law of diminishing marginal productivity
increasing one input, keeping all others constant, will lead to smaller and smaller gains in output

As more of the variable input (labor in this case) is added to the fixed amount of the fixed input (capital in this case), the fixed input becomes scarce (or crowded), which makes the variable input less productive at the margin.
how to find profit graphically
at certain quantity, find the box between price line and where that quantity hits the ATC curve
in both the long and short run,
the perfectly competitive firm's supply curve is its marginal cost curve
how to find avg fixed cost on a cost curve graph
find difference between ATC and AVC at certain quantity level and make rectangle to the y axis
low hanging fruit principle
As we expand the production of an item, we turn first to those whose opportunity costs of producing the item are lowest, and only then to others with higher opportunity costs.
marginal profit
change in profit/change in quantity
average profit
maximum profit =
set marginal profit to 0
relevant factors causing supply curves to shift
new technologies
changes in input prices
changes in the number of sellers
expectations of future price changes
changes in the prices of other products that firms might produce
keep expanding output until MC is
equal to the price of the product