Free Market Systems exam 2

What is a Firm’s goal?

To maximize Profit

How to calculate profit

Total Revenue-Total Cost

How to calculate total revenue?

Price 1 x Quantity 1 + Price 2 x Quantity 2

What are explicit costs

These are costs that require a firm to spend money.

implicit costs

Costs that represent opportunities that could have generated revenue if the firm resources in another way

What are accounting Profits+ how to calculate it

when companies report their profits, Accounting profit = Total revenue - Explicit costs

What are economic profits

Profits that account for implicit costs+ Economic profits=Accounting profit-Implicit cost

What is a production function

the relationship between quantity of inputs and resulting quantity of outputs

What’s marginal product

an increase in output generated by addition unit of input

What is this graph for?

Production function

how to calculate total costs?

Fixed costs + Variable costs

What are Fixed and Variable costs

Fixed costs are costs that stay the same, while variable changes depending on quantity of output produced

How to calculate Marginal Costs

Change in total cost/ change in quantity

How to calculate AFC

Fixed cost/Quantity

how to calculate AVC

Variable cost/quantity

how to find average total cost ATC

AFC+AVC

In the long run, what will happen to fixed costs?

They may be adjusted

What is the Critical Path method (CPM)

A method that allows you to build a crucial path to determine the minimum time required to complete the projects

What is Value chain

Broader set of activities and relationships involved to deliver value to customers

What is vertical intergration?

an activity internally performed that could be performed by another organization

What is Outsourcing?

an arrangement for another organization to perform an activity

What is offshoring?

Moving production or activities to another country

What are charateristics of a competitive market

Participants are price-takers, Standardized goods, Full information, no transaction costs

If marginal revenue exceeds marginal cost,

the firm should increase its output

If marginal cost exceeds marginal revenue

the firm should decrease its output.

At the profit-maximizing level of output

marginal revenue equals marginal cost.

If a firm is making decision in the short run

They only think whether should produce anything or just shut it down. Depends on variable costs, not fixed costs. They should produce if TR – VC > 0, They should shut down if TR – VC < 0. Hence, they should produce if P – AVC > 0.

If a firm is making decision in the long run

They think whether they should stay in the industry or exit.

What is this graph for?

Shutdown rule for short run

Long run

they should produce if P – ATC > 0, They should continue to stay in the market and produce if TR – TC > 0. They should exit if TR – TC < 0.

What graph is this for?

Long run supply curve

If positive economic profits exist P>ATC (Long Run)

New firms enter the market to earn profits, Market supply curve shift outwards until P=ATC

the demand for a perfectly competitive good increases; what happens in the short

and long run?

Increase in demand shifts the demand curve right= Equilibrium price and quantity increase. This causes new firms to enter so supply shifts to the right decreasing price and increasing quantity

If economic profits are positive

firms enter the market and the supply shifts outward until profits are zero.

If economic profits are negative

firms exit the market and the supply shifts inward until profits are zero.

What is an Monopoly?

a firm that is the only producer of a good or service with no close substitutes.

If a firm is a perfect monopoly

if it controls the whole market

if a firm has monopoly power then

it can manipulate price

What are barriers to entry that prevents other firms from entering the market

Scarce resources, Government intervention, Economies of Scale, Aggressive Business Tactics

When a monopolist produces more of a good

the market price is driven down.

Total Revenue is maxed out for monopolies when

MR=0

What is this graph for?

Monopoly Revenue

What is this graph for?

Monopoly profit maximization= Profit Maximation is point B at MR=MC, you find price by finding where it meets demand

Where to find profit from monopoly profit maximization graph

Shade from the right of price between vertical distance of A and B

What is price descrimination?

the practice of charging customers different prices for the same good. The more Monopoly Power it has the more it’s able to discriminate

Monopolistic competition

many firms that sell similar, but differentiated, goods and services.