micro economics final exam

Three questions producers ask

what price to set, what quantity to produce, when to enter and exit the industry

In a competitive market, all producers are

price takers

market is most elastic in the

long run

long run

time after all exit or entry has occurred

short run

the time before exit or entry can occur

If the market controls the price, how do producers maximize profits

by controlling their costs

sunk cost

a cost that cannot be recovered. never relevant because they cannot be changed

to maximize profit, you must take

explicit and implicit costs into account

profit is

total revenue minus total cost

total revenue

price x quantity

total cost is

the cost of producing a given quantity of output

marginal revenue

the change in total revenue from selling an additional unit

marginal cost

change in total cost from selling an additional unit

average cost of production

total cost divided by quantity

profit =

(P-AC) x Q

enter industry when

P>AC

exit the industry when

P<AC

firm should shut down immediately if

TR<VC

slope of supply curve

how costs change as industry output changes

competitive market, firm sets price at

market price

competitive market, maximize profit at

P=MC

market power

power to raise price above marginal cost without fear that other firms will enter the market (no competition)

inelastic demand in products

like pharmaceuticals, if you’re sick you don’t care how much it costs to fix you. monopolies raise price above MC

costs of monopoly

deadweight loss, corruption and inefficiency

benefits of monopoly

incentives for R&D (patents)

economies of scale

large scale productions reduce cost as quantity increases, natural monopoly

natural monopoly

when a single firm can supply the entire market at a lower cost than two or more firms can

barriers to entry

factors that increase the cost to new firms of entering an industry. ownership of an input that is difficult to duplicate, brands and trademarks, development of a relationship with the market

network effects

make a product or service more valuable as the number of users increases

innovation

can lead to products that other firms cant immediately duplicate

sources of market power

patents, laws preventing entry of competitors, economies of scale, hard to duplicate inputs, innovation, copyright, network effects

price controls

on a monopoly can increase output

government ownership

government owns monopolies to keep prices down

antitrust laws

antimonopoly laws, sherman and clayton acts

monopolies

charge higher than competitive firms, reduce total surplus, create deadweight loss, use market power to earn above-normal profits

comparative advantage

who has the lowest opportunity cost

law of demand

inverse relationship between the price of a good/service and the quantity of it that consumers are willing to purchase

quantity demanded

quantity that buyers are willing and able to buy at a particular price

consumer surplus

difference between the maximum price a consumer is willing to pay and the market price. consumers gain from exchange

total consumer surplus is where on the graph

area of under demand curve and above price

change in demand

shifts the ENTIRE demand curve

factors that shift demand

income, population, price of substitutes and compliments, expectations, tastes

law of supply

there is a positive relationship between the price of a product and the amount of it that will be supplied

quantity supplied

quantity that sellers are willing and able to sell at a particular price

producer surplus

difference between market price and the minimum price a producer would be willing to sell. producers gain from exchange

total producer surplus is found

above the supply curve and below the price up to the quantity traded

change in quantity supplied

moves along the same supply curve

change in supply

shifts the ENTIRE supply curve

factors that shift supply

technological innovations, taxes and subsidies, expectations, entry or exit of producers, changes in opportunity costs, elements of nature and political disruptions

marginal utility

change in utility from consuming an additional unit

diminishing marginal utility

each additional unit of a good adds less to utility than the previous unit did

elimination principle

above-normal profits are eliminated by entry, and below-normal profits are eliminated by exit

the invisible hand will not work if

prices do not accurately signal costs and benefits, markets are not competitive, commodities