ECON Test 2

explicit costs

MONETARY payments made by individuals, firms, and governments for the use of land, labor, capital, and entrepreneurial ability owned by others. Also known as ACCOUNTING COSTS.

implicit costs

the OPPORTUNITY COST of using owned resources, cost for which no monetary payment is explicitly made.

economic costs

the costs associated with the use of resources; the SUM of E and I costs

zero economic profit means...

revenue covers monetary payment and opportunity cost

Marginal Product (MP):

the ADDITIONAL output produced as a result of utilizing ONE MORE unit of a variable resource (land or capital)

MP equation

change in total product/change in variable resource

in perfect competition, MR =

price

if we produce, profits =

(P-ATC)*Q

if we shutdown, profits =

-TFC

characteristics for perfect conpetition

1. LARGE number of buyers and sellers

2. STANDARDIZED, or homogeneous products

3. sellers are price TAKERS

4. ability to EASILY enter or exit an industry

characteristics of monopoly

1. SINGLE seller

2. NO CLOSE substitutes

3. BLOCKED entry

3. seller is a price MAKER

_______ are the fundamental reason why monopoly remains the only seller in the market, these are the reasons why other firms are not able to enter the market and compete with the monopoly firm

barriers to entry

for monopoly, MR =

the curve BELOW demand

price discrimination

the practice of selling the SAME good or service to different consumers at DIFFERENT prices

first degree price discrimination

practice of charching EACH and every consumer the price that she is WILLING and ABLE to pay for a good or service.

first degree price discrimination is also known as

perfect price discrimination or personal pricing

second degree price discrimination

the practice of charging DIFFERENT prices PER UNIT for different quantities, or blocks, of a good or service

second degree price discrimination is also known as

block pricing

third degree price discrimination

the practice of DIVIDING market participants into GROUPS based on their elasticities of demand in order to charge each group a DIFFERENT PRICE for the SAME good or service

_______ price discrimination generates the best outcome for a pure monopoly

first degree

by charging consumers the ____ price they are willing and able to pay the monopolist obtains higher profits than any other pricing method available in the firm

HIGHEST

characteristics of monopolistic competition

1. relatively LARGE number of sellers

2. DIFFERENTIATED product

3. SOME CONTROL over the price they charge

4. relatively EASY market entry AND exit

oligopoly

market structure characterized by a FEW LARGE producers, of wither STANDARDIZED or DIFFERENTIATED products, operating in industries with EXTENSIVE entry BARRIERS. these producers are PRICE MAKERS and behave STRATEGICALLY when making decisions (mutual independence)

mutual independence

a situation in which a CHANGE in the STRATEGY followed by one producer will likely affect the sales, profit, and behavior of ANOTHER producer

role of utility in analyzing decision making problems

utility associates a VALUE to each coice, in such a way that MORE utility represents preferred choices for the decision maker (the MORE utility, the BETTER)

law of diminishing marginal utility

states that the MU associated with the consumption of a good or service become SMALLER with EACH EXTRA UNIT that is consumed in a given time period

how do we model consumption decisions

a consumer decides how much to consume of each good by choosing the consumption bundle that MAXIMIZES his/her UTILITY, subject to INCOME and PRICES

equal marginal principle

idea that consumers MAXIMIZE their utility when they allocate their limited incomes so that the MU per DOLLAR spend on each of their final choices in a bundle is EQUAL

marginal revenue equation

MR = change in total rev/change in Q

marginal cost equation

MC = change in total cost/change in Q

TC =

TFC + TVC