Costs and Profit Maximization Under Competition

These flashcards cover major concepts from the lecture on costs and profit maximization in competitive industries, helping to reinforce key terms and definitions.

What are the three key questions every producer must answer in a competitive industry?

What price to set? What quantity to produce? When to enter and exit the industry?

What does it mean for a firm to be a 'price taker'?

A firm accepts the market price and plans its production based on that price.

Define 'sunk cost'.

A cost that cannot be recovered and is not relevant for decision making.

What is the difference between explicit and implicit costs?

Explicit costs require a money outlay, whereas implicit costs are opportunity costs that do not involve a direct cash payment.

What is the formula for economic profit?

Economic profit = Total revenue - Total costs (including implicit costs).

What quantity of production maximizes profit for a competitive firm?

When marginal revenue (MR) equals marginal cost (MC).

What happens to the profit-maximizing quantity if the price increases?

The firm will expand production until it is maximizing profit again where price equals marginal cost.

What should a firm do if the price falls below average variable cost (AVC)?

The firm should shut down immediately.

Define 'average cost of production'.

The cost per unit, calculated as total cost divided by the number of units produced.

What characterizes a decreasing cost industry?

An industry where costs decrease with greater output, often indicated by a downward-sloping supply curve.

Under what conditions do firms enter or exit an industry?

Firms enter when price is greater than average cost (P > AC) and exit when price is less than average cost (P < AC).

What does maximizing profit require a firm to account for?

Both explicit and implicit costs.

What is the relationship between price and marginal cost for profit maximization?

Firms maximize profit by producing where price equals marginal cost.

What is a constant cost industry?

An industry where costs do not change with greater output.

How does the concept of average cost impact profitability?

Profits can be calculated as (Price - Average Cost) multiplied by quantity sold.