ECON TEST #3

Total Cost

Fixed Cost + Variable Cost

Fixed Costs

Costs that remain constant as a firm’s level of output changes

Variable Cost

Costs that change as the firms level of output changes

Marginal Cost

Change in Total Cost / Change in Quantity

Average Total Cost

Total Cost / Quantity

Average Fixed Cost

Fixed Cost / Quantity

Average Variable Cost

VC / Q

Implicit Cost

A nonmonetary opportunity cost

Explicit Cost

A cost that involves spending money

Marginal Product Of Labor

Change In Quantity / Change In Labor

Average Product Of Labor

Total Quantity / Quantity Of Labor

Long Run Average Cost

A curve that shows the lowest cost at which a firm is able to produce a given quantity of output in the long run, when no inputs are fixed.

Economies Of Scale

When a firm’s long-run average cost fall as it
increases the quantity of output produced.

Constant Returns to Scale

LARC remain unchanged as a firm increases output

Diseconomies Of Scale

When a firms LARC rises as a firm increases output.

Minimum Efficient Scale

The level of output at which all economies of scale are exhausted

ONLY in Perfectly Competitive Market:

Price = Demand = AR = MR

Market Demand Curve

Normal good, downward sloping curve

Firm Demand Curve

Perfectly elastic, many producers each a very small fraction of overall market

If TR > TC

Firm is making a profit

If TR < TC

Firm is experiencing a loss

If TR = TC

Break Even operations

Perfectly competitive firms are price takers

They are unable to affect the market price. This is because they are tiny relative to the market and sell exactly the same product as everyone else.

When MR = MC this is quantity where firm is receiving the

Greatest Profit

If MR > MC

Firm can make more revenue by producing another unit

If MR < MC

Firm loses money from producing last unit

Total Revenue

P* X Q*

Total Cost

PATC X Q*

If P < AVC

SHUT DOWN

Allocative efficiency

a state of the economy in which production represents consumer
preferences; every good is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Monopolistic competition

a market structure in which barriers to entry are low and many firms compete by selling differentiated products.

Monopoly

a market structure consisting of a firm that is the only
seller of a good or service that does not have a close substitute.

Public Franchise

Exclusive legal provider of a good or service.

Market Power

the ability of a firm to charge a price greater than marginal cost

Collusion

An agreement among firms to charge the same price or otherwise not to compete.

Antitrust Laws

Laws aimed at eliminating collusion and promoting competition among firms.

Sherman Act 1890

Prohibits “restraint of trade” including price fixing and collusion. Also outlawed cartels and trusts.

Clayton Act 1914

Prohibits mergers or price discrimination if it lessons competition.

Robinson-Patman Act

Prohibited firms from buying stock in competitors and from having directors serve on boards of competing firms. Prohibit price discrimination if the result reduces competition.

Federal Trade Commission

Unfair methods of competition and deceptive acts are made illegal.

Department Of Justice Antitrust Division 1956

Led by Economist Dr. Donald Turner who significantly impacted antitrust law through economic analysis of:

• Market definition
• Measures of concentration (Herfindahl-Hirschman
Index)
• Merger standards (impact to market concentration,
horizontal mergers, vertical mergers)

Horizontal megers

Between firms in the same industry

Vertical mergers

Between two firms at different stages of the production process

Appropriate Market

the smallest market containing the firms’ products for which an overall price rise within the market would result in total market profits increasing.