Flashcards Economics Midterm Review: Costs, Market Structures, and Monopoly Characteristics

Production in the Short Run

Short run things you can't change, e.g., plant size, heavy machinery.

Production in the Long Run

All factors can be changed over a long run of time.

Short-run

The time period when at least one input, such as plant size, cannot be changed.

Long run

The time period in which all factors of production can be varied.

Total Cost

The sum of its total fixed cost and total variable cost.

Fixed Costs

Costs that do not vary with output and are fixed for a certain period of time, e.g., rent.

Variable Costs

Costs that vary with the rate of production, e.g., wages paid to workers and purchases of materials.

Average Total Cost (ATC)

Total cost divided by the number of units produced. TC/Q

Average Fixed Cost (AFC)

Total fixed costs divided by the number of units produced. TFC/Q

Average Variable Cost (AVC)

Total variable costs divided by the number of units produced. TVC/Q

Marginal Cost

The change in total cost due to a one-unit change in production rate. Change in total cost/change in output.

Planning Horizon

The long run, during which all inputs are variable. ITS ALL ABOUT THE U, U Graph

Economies of Scale

Decrease in long-run average costs resulting from increases in outputs (quantity).

Diseconomies of Scale

In the long run, the average cost that occurs as output increases. EX. Inefficiency, red tape and bureaucracy

Minimum Efficient Scale

The lowest rate of output per unit time at which long-run average costs for a particular firm are at a minimum.

Perfect Competition

A market structure in which the decisions of individual buyers and sellers do not affect the market price.

Characteristics of Perfect Competition

1. Large number of buyers and sellers
2. Homogeneous product (indistinguishable across firms)
3. Full access to all relevant information for buyers and sellers
4. Freedom to enter or exit the industry without serious impediment

Price Taker

A perfectly competitive firm that must take the price of its product as given.

Demand Curve under Perfect Competition

Perfectly elastic at the going market price.

Total Revenue (TR)

The overall amount of money brought in from sales, calculated as price multiplied by quantity sold:
$TR = P \times Q$

Goal of the Firm

Profit maximization. MR=MC

Monopoly

The single supplier of a good or service for which there is no close substitute.

Barriers to Entry

Obstacles that prevent new competitors from easily entering an industry, allowing established firms to sustain long-run economic profits.

Examples:

• Large economies of scale
• Legal and government restrictions
• Patents (providing protection for 20 years)
• Tariffs
• Costly regulations

Demand Curve under Monopoly

Downward sloping, because a single firm represents the entire industry and faces the complete market demand curve.

Patent

Intellectual property, good for 20 years.

Deadweight Loss

The portion of consumer surplus that no one in society can obtain in a situation of monopoly.

Cartel

An association of producers in an industry that agree to set common prices and output quotas to prevent competition, acting like a single entity despite having multiple sellers.

A monopolist is a

price searcher who tries to find the profit-maximizing price-output combination.

Why are Monopolies bad for society

• Prices are set higher and output is restricted, creating an inefficiency where price exceeds marginal cost.
• They may fail to be profitable or attract needed investment due to excessive risk.

patent defined

a legal right granted by a government to an inventor, excluding others from making, using or selling an invention for a limited time.

A demand curve under PC

Is a horizontal graph, THINK HE Perfectly elastic and horizontal (Horizontal Elastic )

Best example of perfect competition?

agriculture, ex. wheat or corn

Reasons for economies of scale

• Specialization: Increased division of tasks or operations.
• Dimensional factors: Large-scale firms often require proportionately less input per unit of output.
• Improved productive equipment: Larger enterprises can take advantage of larger-scale machinery.

Reasons for Diseconomies of Scale

1. Limits to the efficient functioning of management
2. Difficulty coordinating and managing larger operations
3. Growth in supervision layers causing communication and information costs to increase more than proportionately

Characteristics of Monopoly

1. Single seller
2. Significant barriers to entry
3. Downward-sloping demand curve
4. Legal protections, such as patents lasting 20 years

why are monopoly discouraged?

not always profitable, patent may not attract investment and can be deemed uneconomic

Price is too high, output is less

four characteristics of monopoly

Single seller, barriers to entry exist, demand curve is downward sloping, patent last 20 years

demand curve under Monopoly

downward sloping

A pure monopolist faces the industry demand curve for the entire market because the monopoly is the entire industry

what does it mean when a firm places, a perfectly elastic demand curve?

it is a price taker