Microeconomics

Comcepts from Section 9.5

The Marginal Cost Curve intersects both the average variable cost and the average total cost curves at their _______ points.

minimum

As the level of output increases, the difference between the value of average total cost and average variable cost:

decreases because average fixed cost decreases as output increases

Average Total Cost

Total Cost/Number of Product

Average Variable Cost

Total Variable Cost/Number of Product

Average Fixed Cost

Total Fixed Cost/Number of Students

Marginal Cost

Change in Total Cost/Change in number of participants

In a perfectly competitive market, P=MR=AR because

firms can sell as much output as they want at the market price

When the difference between TR and TC is at its maximum positive value:

MR = MC and Slope TR= Slope TC

When maximizing profits, MR = MC is equivalent to P = MC because

the marginal revenue curve for a perfectly competitive firm is the same as its demand curve

Why don’t firms maximize revenue rather than profit?

At the point where revenue is maximized, the difference between total revenue and total cost may not be maximized

Firm’s Shutdown Point in the Short Run

The minimum point on the average variable cost curve

Firm’s Exit Point in the Long Run

minimum point on the average total cost curve

Why are firms willing to accept losses in the short run but not in the long run?

There are fixed costs in th short run but not in the long run

Relationship between a perfectly competitive firm’s marginal cost and supply curves

A firm’s marginal cost curve is equal to its supply curve for prices above average variable cost

How to derive market supply curve

horizontally adding the individual firm’s supply curves

perfectly competitive market

market that meets these conditions:

1) many buyers and sellers

2)all firms selling identical products

3) no barriers to new firms entering the market

sunk costs

costs that a firm has already paid and cannot recover.

When are firms likely to enter and exit an industry

Economic profits attract firms to enter an industry, and economic losses cause firms to exit

Would a firm earning zero economic profit continue to produce, even in the long run?

they will continue to produce because such profit corresponds with positive accounting profit

Long-Run Supply Curve Shape in a Perfectly Competitive Market

a horizontal line equal to the minimum point on the typical firm’s average total cost curve

Economic Profit

Accounting Profit minus opportunity cost of time

Monopolistically Competitive Markets

firms face downward-sloping demand curves, and the products competitors sell are differentiated

With a downward-sloping demand curve average revenue..

is equal to price, whether demand is downward sloping or not

Why is marginal revenue below price on a downward sloping demand curve?

because the firm must lower its price to sell additional units

A monopolistically competitive firm doesn’t produce where P=MC like a perfectly competitive firm because

P exceeds MR for a monopolistically competitive​ firm, and​ it's MR that must equal MC for profit maximization.

When new firms enter a monopolistically competitive​ market, the economic profits of existing firms

will decrease because their demand curves will shift to the left.

What is the difference between zero accounting profit and zero economic​ profit?

Zero economic profit includes a​ firm's implicit costs but zero accounting profit does not.

Do all firms that are currently earning an economic profit eventually become​ "victims of their own​ success"?

A firm can only hope to earn a profit in the long run if it is able to continually find new ways to differentiate its product.

innovation

the practical application of an invention. they dwindle when a firm produces fewer products

What are the differences between the​ long-run equilibrium of a perfectly competitive firm and the​ long-run equilibrium of a monopolistically competitive​ firm?

Unlike perfectly competitive​ firms, in the long run monopolistically competitive firms charge a price greater than marginal cost and do not produce at minimum average total cost.

A monopolistically competitive firm is not productively efficient because it produces a level of output where

average total cost is not at a minimum

A monopolistically competitive firm is not allocatively efficient because

price exceeds marginal cost

Though monopolistically competitive markets are not allocatively or productively​ efficient, consumers benefit in that

they are able to purchase a differentiated product that more closely suits their tastes.

Marketing

all the activities necessary for a firm to sell a product including​ advertising, product​ design, and product distribution.

Brand Management

maintains product differentiation and earns economic profits in the short run.

key factors that determine the profitability of a firm in a monopolistically competitive​ market?

differentiate their product and produce at lower average cost than competitors.

How might a monopolistically competitive firm continually earn economic profit greater than​ zero?

differentiate its product and produce at lower average cost than competitors

Oligopoly

where a small number of interdependent firms compete.

Barriers to Entry and their affect on competition

Without barriers to entry, new firms will enter industries where firms are earning economic profits.

Most Important Barriers of Entry

economies of​ scale, ownership of a key​ input, and government imposed barriers.

Economies of Scale

A situation in which a​ firm's long-run average costs fall as the firm increases output.

Game Theory

The study of how people make decisions where attaining goals depends on interactions with others.

Cooperative Equilibrium

A game outcome in which players seek to increase their mutual payoff.

Noncooperative Equilibrium

A game outcome in which players pursue their own​ self-interest.

Dominant Streategy

A strategy that is the best for a​ firm, no matter what strategies other firms use.

Nash Equilibrium

A situation in which each firm chooses the best​ strategy, given the strategies chosen by other firms.

Price Leadership

A situation in which one firm announces a price​ change, which is matched by other firms in the industry.

Implicit Collusion

Where firms signal to each other without actually meeting and agreeing to not compete

Cartel

a group of firms that collude by agreeing to restrict output to increase demand

Sequential Game

a game in which one firm acts first and then the other firms respond

Decision Tree

contains decision nodes where firms must make​ decisions, arrows illustrating the​ decisions, and terminal nodes showing the resulting rates of return.

Five Competitive Forces

competition from existing firms, the threat of potential entrants, competition from substitutes, the bargaining power of buyers, and the bargaining power of suppliers

Strength of the five competitive forces over time

Does not remain constant over time. For example, existing firms may advertise to create product loyalty to make entry less attractive, reducing the threat from additional potential entrants.

Monopoly

A firm that is the only seller of a good or service that does not have a close substitute

4 main reasons a firm becomes a monopoly

the government blocks​ entry, control of a key​ resource, network​ externalities, and economies of scale.

Public Franchise

a firm designated by the government as the only legal provider of a good or service

Natural Monopoly

Develop naturally due to economies of scale.

Arises when one firm can supply the entire market at a lower average total cost than can two or more firms.

Patents

Exclusive right to a product for a period of 20 years from the date the product is invented.

Reduce competition, but the government grants them to encourage firms to spend money on research to create new products

Will a monopoly that maximizes profit also be maximizing revenue?

A monopoly that maximizes profit is NOT also maximizing revenue because revenue is highest when marginal revenue equals zero.

Why does market power lead to deadweight loss

because firms with market power charge a price that is greater than marginal cost to maximize profit

DSize of deadweight loss due to monopoly

When a monopoly maximizes profit, deadweight loss will be larger if demand is inelastic because price will be farther from marginal cost

Price Discrimination Circumstances

Some consumers must have greater willingness to pay for the product than others and a firm must know consumer willingness to pay for the product.

Antitrust Laws

intended to make illegla any attempts to form a monopoly or to collude

Horizontal merger

merger between firms in the same industry

Vertical Merger

a merger between firms at different stages of the production of a good