Econ Exam 3
Terms in this set (71)
Describes the relationship between quantity of inputs used on quantity of output produced
Cannot be changed in the short run
Can be changed
-At least 1 fixed input
-shut down price=minimum of AVC
-All inputs are variable
-break-even price=minimum of ATC
-Costs that don't depend on output (fixed inputs)
-can be positive, even if the firm doesn't produce any output in the short run
Costs that do depend on output (variable inputs)
Diminishing returns to an input occur:
When some inputs are fixed and some are variable
2 Reasons for "U" shape:
1. spreading effect(FC are spread)
2. diminishing returns (VC are increasing)
Economies of scale
-As a firm grows, it is able to lower it's overall cost
-ex. a diamond mining company
-Firms tend to experience economies of scale at low levels of production and diseconomies of scale at high levels of production
1. many buyers-can't affect price
2. many sellers-can't affect price
3. no (small) barriers to entry/exit
4. standardized product-all sell the exact same
-customer is right
5. no firm has market power
-a firm is price taker
6. all firms seek to maximize profits
-produce where MR=MC
-ex. corn producers
1. one seller
2. barriers to entry-economies of scale (high FC, low VC)
-control of resources
-government (patents and copyrights)
3. no close substitutes
ex. Comcast, oil, diamond producer
1. many firms
2. free entry/exit
3. differentiated product
-gives each firm a small monopoly
ex. small business
1. large firms
2. few firms
3. barriers to entry
4. Diff. or standard-pepsi vs. oil
ex. Nintendo- video game consoles
measure of concentration in industry
HHI<10,000 the industry is competitive
10,000-1800 is somewhat competitive
HHI>1800 is an oligopoly
The average fixed cost curve:
Always declines as more output is produced in the short run
A monopolist will:
charge higher prices than a competitive industry
Which of these 2 (monopolistic competition or oligopoly) arises from the same forces as monopoly except in weaker form?
What are the 2 necessary conditions for perfect competition?
The ability of a monopolist is to raise its price above the competitive level by reducing output is known as:
What is the difference between monopolistic competition and perfect competition?
Name 1 barrier to entry, that can cause a monopoly to exist
- control over natural resources
The system of market structures is based on what 2 dimensions?
-control over natural resources
What condition of perfect competition ensures that the number of an industry can adjust the market condition?
In the short run, if P=ATC, a perfectly competitive firm:
produces output and earns zero economic profit
A common example of monopolistic competition is the market for:
Which statement is correct for a firm that can price-discriminate?
It should adjust prices so that customers with price-elastic demand pay lower prices than those with inelastic demand
The long-run industry supply curve will:
be more elastic than the short-run industry supply curve
If a monopolist is producing a quantity that generates MC=P, then profit:
can be increased by decreasing production
There are diminishing returns to an input
when an increase in the quantity of that input, holding the levels of all other inputs fixed, leads to a decline in the marginal product of that input.
The slope of the total product curve is also known as
Diminishing returns to an input means that as a firm continues to produce, the total product curve will have what kind of slope?
total cost curve
shows how total cost depends on the quantity of output.
-is the change in total cost generated by producing one more unit of output.
-tells the producer how much one more unit of output costs to produce
-The marginal cost curve must cross the minimum of the average total cost curve.
-=The slope of the total cost curve
average total cost
-is total cost divided by quantity of output produced.
- it tells the producer how much the average or typical unit of output costs to produce
Average fixed cost
is the fixed cost per unit of output.
Average variable cost
-is variable cost divided by the quantity of output-
-AVC = ATC − AFC
The spreading effect.
-The larger the output, the greater the quantity of output over which fixed cost is spread, leading to lower average fixed cost.
- So at low levels of output, the spreading effect dominates the diminishing returns effect and causes the average total cost curve to slope downward.
The 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.
-when output is large, the diminishing returns effect dominates the spreading effect, causing the average total cost curve to slope upward.
is the quantity of output at which average total cost is lowest—it corresponds to the bottom of the U-shaped average total cost curve.
3 general principles that are always true about a firm's marginal cost and average total cost curves:
1.At the minimum-cost output, average total cost is equal to marginal cost.
2.At output less than the minimum-cost output, marginal cost is less than average total cost and average total cost is falling.
3.And at output greater than the minimum-cost output, marginal cost is greater than average total cost and average total cost is rising.
When a firm is producing zero output, total cost equals
There are increasing returns to scale
when long-run average total cost declines as output increases
There are decreasing returns to scale
when long-run average total cost increases as output increases.
There are constant returns to scale
when long-run average total cost is constant as output increases.
A firm is at the minimum of its short run average cost curve, but also experiencing diseconomies of scale. A permanent increase in output will:
increase average total cost in the long run
have no effect on the market price of the good or service it sells.
is a consumer whose actions have no effect on the market price of the good or service he or she buys.
is the fraction of the total industry output accounted for by that firm's output.
-exists when economies of scale provide a large cost advantage to a single firm that produces all of an industry's output.
-ATC is lower if there is a single firm in the market
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 its marginal cost
A firm should continue to produce in the short run as long as price is at least equal to
industry supply curve
shows the relationship between the price of a good and the total output of the industry as a whole.
short-run market equilibrium
when the quantity supplied equals the quantity demanded, taking the number of producers as given.
long-run market equilibrium
when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.
long-run industry supply curve
shows how the quantity supplied responds to the price once producers have had time to enter or exit the industry.
With perfect competition, efficiency is generally attained in
the long run but not the short run.
Compared to the short-run industry supply curve, the long-run industry supply curve will be more
Which of the following will happen if perfectly competitive firms are earning positive economic profit?
The short-run industry supply curve will shift right
Which of the following statements is true of a monopoly as compared to a perfectly competitive market with the same costs?
Consumer surplus is smaller
Which of the following markets is an example of a regulated natural monopoly?
local cable TV
Which of the following is most likely to be higher for a regulated natural monopoly than for an unregulated natural monopoly?
charges all consumers the same price.
Sellers engage in price discrimination when:
they charge different prices to different consumers for the same good.
Perfect price discrimination takes place when
a monopolist charges each consumer his or her willingness to pay—the maximum that the consumer is willing to pay.
Which of the following characteristics is necessary for a firm to price-discriminate?
some control over price
can lead to increased efficiency in the market
With perfect price discrimination, consumer surplus
Which of the following is a technique used by price discriminating monopolists?
I. advance purchase restrictions
II. two-part tariffs
III. volume discounts
A price discriminating monopolist will charge a higher price to consumers with
a more inelastic demand
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