mircoeconomics -- chapter 13

total revenue

the amount a firm receives for the sale of its output

totoal cost

the market value of the inputs a firm uses in production

equation for profit

total revenue - total cost

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm

economic profit equation

total revenue - total cost

accounting profit equation

total revenue - total explicit cost

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

marginal product

the increase in output that arises from and additional unit of input

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases (marginal cost increases —> output increases)

the 2 types of total costs

fixed and variable costs

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

average total cost equation

total cost / quantity of output

average fixed cost equation

fixed cost / quantity of output

average variable cost equation

variable cost / quantity of output

marginal cost

the increase in total cost that arises from an extra unit of production

marginal cost equation

CHANGE in total cost / CHANGE in quantity

efficient scale

the quantity of output that minimizes average total cost

3 properties of these cost curves

• marginal eventually rises with the quantity of output

• average-total-cost curve is U-shaped

• the marginal-cost curve crosses the average-total-cost curve at the minimum of average total cost

economies of scale

the property whereby long-run average total cost falls as the quantity of output increases

diseconomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

constant returns to scale

the property whereby long-run average total cost stays the same as the quantity of output changes

competitive markets

a market with many buyers and sellers trading identical products each buyer and seller is a price taker

Perfectly competitive

so many buyers and sellers that no single buyer or seller has any influence over the market price

3 characteristics of competitive markets

1. There are many buys and sellers in the market 

2. The goods offered by the various sellers are largely the same

3. Firms can freely enter or exit the market

Average revenue

TR/output

marginal revenue

the change in TR from an additional unit sold

Shutdown

a short-run decision not to produce anything during a specific period of time because of current market conditions

exit

refers to a long-term decision to leave the market

When should firms shut down?

• TR < VC

• TR/Q < VC/Q

• P < AVC

When should firms exit the market?: 

• TR < TC

• TR/Q < TC/Q

• P < ATC

When do firms make a profit?

• profit = TR - TC

• Profit = (TR/Q - TC/Q) x Q

• Profit = (P - ATC) x Q

Efficient scale

the level of production with the lowest ATC

Monopoly

 a firm that is the sole seller of a product without close substitutes monopoly

resources

a key resource required for production  is owned by a single firm

Government regulation

the government gives a single firm the exclusive right to produce some good or service

The production process

the process a firm uses to transform inputs into outputs

Natural monopoly

a monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than 2 or more firms 

Total revenue

P x Q

Average revenue

 TR / Q

Marginal revenue

 change of TR / change of Q

Profit

TR - TC

Output effect

more output is sold, so Q is higher, which ends an increase in total revenue

Price effect

price falls, so P is lower, which tends to decrease TR 

Profit on the typical unit sold

 P - ATC

Price discrimination

the business practice of selling the same good at different prices to different customers

Arbitrage

the process of buying a good in one market at a low price and selling it in another market at a higher price to profit from the price difference

Perfect price discrimination

a situation in which the monopolist knows exactly the willingness to pay off each customer and can change each customer a different price

Monopsony

 a market condition with only one buyer → the buyer controls the price

Imperfect competition

the typical firm also has some degree of market power, but its market power is not so great

Oligopoly

 a market structure in which only a few sellers offer similar or identical products

Concentration ratio

used to measure a market’s domination by a small number of firms 

Monopolistic competition

a market structure in which many first sell products that are similar but not identical 

A market with monopolistic competition has what?

• Many sellers

• Product differentiation

• Free entry and exit

Many sellers

firms are competing for the same group of customers

Product differentiation

 each firm produces a product that is at least slightly different from those of other firms 

Free entry and exit

firms can enter or exit the market without restriction 

4 types of market structures

• Monopoly 

• Oligopoly

• Monopolistic competition

• Perfect competition

2 characteristics that describe the long-run equilibrium in a monopolistically competitive market

1. Price exceeds MC ← monopoly market 

2. Price - ATC ← competitive market 

Treaty of advertising

 that the content of the advertisement is irrelevant

duopoly

an oligopoly with only two firms

Collusion

 an agreement among firms in a market about quantities to produce or prices to change

Cartel

a group of firms acting in unison

What must a cartel agree on?

• They must agree on the total level of production

Nash equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen (in their own best interest)

Two effects

• Output effect

• Price effect

Output effect

because the price is above marginal cost, selling 1 more output at the going price will raise profit

Price effect

raising production will increase the total amount sold, which will lower the price of the output and lower the profit on all the other gallons sold.

Prisoner’s dilemma

a particular “game” between two captured prisoners that illustrates why cooperation is difficult to maintain even when mutually beneficial.

Dominant strategy

 a strategy that is best for a player in a game regardless of the strategies chosen by the other players