econ (until 2nd midterm)

explicit costs, implicit costs

Components of opportunity cost

… … require an outlay of money–direct, out-of-pocket payment

… … are measured by the benefits that are foregone–does not require direct outlay of money

accounting, economic

• … profit = Total Revenue – explicit costs

  • Tax compliance

• … profit = Total Revenue – (explicit costs + implicit costs)

marginal cost, constant, decreasing, learn

… …: in production decisions, the additional cost incurred by producing one more unit of a good or service

… marginal cost: cost of producing one additional unit is the same as the cost of producing the previous unit

… marginal cost: cost of producing one additional unit is lower than the cost of producing the previous unit–this happens as workers …

marginal benefit, decreases

… … is the benefit derived from consuming one additional unit of a good–this … with additional unit of good/service produced

optimal quantity

… … is quantity at which marginal benefit is equal to or greater than marginal cost

firms, production function, fixed, output, variable, fixed, variable, product

… are organizations that produce goods and services

Quantity of goods that a firm produces depends on its inputs–… … shows the relationship between quantity of output a firm produces and the quantity of inputs a firm uses to produce output

… input: quantity is fixed/cannot be varied for a period of time (ex: leased land), does not change with quantity of … produced

… input: can be varied at any time (ex: number of staff employed)

Short run: the period of time in which as least one input is …

Long run: when all inputs are …

Total … curve displays relationship between inputs/outputs

marginal product of labor, output, input, diminishing returns to input, up

… … … … (MPL): additional quantity of output that is produced by using one more unit of that input

Formula: (change in quantity of … produced)/(change in quantity of …)--this is slope of total product curve

… … … …: MPL steadily declines as more input is used–each successive unit of input will increase the production by less than the last unit of input used (all other things being equal)

With more fixed input, each worker can produce more–shifts total product curve … (ex: MPL of each worker is higher when there is more land and more ovens are bought, so the MPL curve shifts up too)

fixed, variable, upward, marginal cost, total cost, output, upward, total, output, downward, upward

Types of costs

… costs (overhead costs): the cost that is incurred by a firm that does not depend on quantity of output produced (ex: the building, its inspection, utilities, etc)

… cost: the cost incurred by a firm depending on the quantity of output produced (ex: employees)

Total cost = fixed cost + variable cost

For the short run, the total cost curve is … sloping, increasing as we produce more output, as a result of diminishing returns (additional units of output require more and more input, so the cost increases)

… …: change in total cost generated by producing one more unit of output– formula is (change in … …)/(change in quantity of … produced)--this is an … sloping curve due to diminishing returns (bigger cost to produce one, as each worker produces less)

Average total cost: (… cost)/(quantity of …)--for fixed cost, … sloping curve; for variable cost, … sloping curve

nike, spreading, diminishing returns, spreading, diminishing returns, spreading, upward, marginal cost, rising, falling, lowest, declines, increases

Behind supply curve graphs

Average total cost curve looks like the … logo–the … effect (the larger output, fixed cost is spread over larger quantity of output produced); the … … effect (the greater amount of variable input required to produce additional units)--initially, the … effect …, but later, … … dominates–at high levels of output, spreading effect is weaker than DRE

AFC curve slopes downward due to the … effect

AVC slopes … due to diminishing returns, flatter than the … … curve, cost is averaged across output

If MC is above ATC, ATC is …; if MC is below ATC, ATC is …

MC crosses ATC curve at ATC’s … point

MC … a bit at first, and only after a certain output it …–increasing specialization initially leads to lower MC, then diminishing returns sets in once the benefits from specialization are exhausted and MC rises

minimum-cost, equal, less, falling, greater, rising

The …-… output is the quantity of output at which ATC is lowest–bottom of U-shaped ATC curve

3 principles always true of a firm’s MC and ATC curves:

1) At minimum-cost output, ATC is .. to MC

2) At output less than minimum-cost output, MC is … than ATC and ATC is …

3) At output greater than the minimum-cost output, MC is … than ATC and ATC is …

variable, fixed, u, middle, minimum, returns to scale, decreases, increases

All inputs are … in the long run–fixed cost may also vary

The firm will choose its … cost in the long run based on the level of output it expects to produce

Short run ATC curves are …-shaped, while long run ATC curve is very long U-shape (flattens out in the …)--they intersect in the … point of long-run ATC curve

… … …: how much output you’re expecting to produce

Beginning is increasing returns to scale (ATC … as output increases), middle is constant returns to scale (ATC is constant as output increases), and end is decreasing returns to scale (ATC … as output increases)

price-takers, many, share, standardized product, entry, exit

Perfect competition

All market participants (consumers and producers) are …-… (their actions have no effect on price)

There are … producers, each with a small market … (the fraction of the total industry output accounted for by that producer’s output)

… … (commodity): consumers regard different sellers’ products as the same/identical–products are only different if consumers believe them to be

Free … and …: most producers can easily enter into an industry, and existing producers can easily leave it

revenue, cost, marginal revenue, total revenue, quantity, price, elastic, crosses, marginal cost

Perfect competition

Each firm’s Total Revenue = Price x Quantity Sold, and their Profit = Total … – Total …

… …: change in total revenue generated by an additional unit of output

MR = (change in … …)/(change in …)

MR=… since the firm is a price-taker–it can sell as much as it likes at the current market price–MR curve is horizontal line at the market price, and it has a perfectly … demand curve which=MR curve

Optimal output rule: profit is maximized (and loss is minimized) by producing the quantity of output at which the MR of the last unit produced equals the … …, or where P=MC

If MR > MC, producing more will add to profit; if MR < MC, producing less will add to profit

On graph, optimal output … MR curve–this point is the profit-maximizing quantity

profitable, breaks even, loss, price, quantity, profitable, loss, greater, less

Perfect competition: when is production profitable?
If TR > TC, the firm is …; If TR = TC, it … …; If TR < TC, it incurs a …

Profit = (… minus ATC) times …

ATC perspective: if firm produces a quantity at which P > ATC, it is … (economic profit); if firm produces a quantity at which P = ATC, it breaks even; if firm produces a quantity at which P < ATC, it incurs a …

On graph: firm is profitable when price is … than ATC at the MC=MR point (region under MR curve up until ATC point under MR curve is profit–multiply area like rectangle); firm is not profitable when price is … than ATC at the MC=MR point (region above MR curve up until ATC point above MR curve is loss–multiply area like rectangle)

shut down, fixed, below, equal, greater, industry supply curve, quantity, price, short-run, minimum, below, supply

Perfect competition

When a firm is in losses, it should not … …

… costs must be paid regardless of whether the firm produces in the short run–it cannot be changed, so it’s irrelevant to the decision about whether to shut down in the short run–other costs, such as variable, do matter

When market price is … minimum AVC, a firm should cease production immediately–minimum AVC is … to the shut-down price

When price is … than minimum AVC, the firm should produce in the short run

… … …: relationship between price of good and total output of industry as a whole

Short-run industry supply curve–how … supplied by an industry depends on the market …, given a fixed number of producers

…-… industry supply curve–a firm will produce at every price above … ATC where price intersects MC curve–however, it will stop producing in the short run if market price falls … the shut-down price (MC curve, above shut-down price, is the firm’s … curve)

short-run, time, profit, elastic, upward, downward, higher, fall

Perfect competition

…-… market equilibrium is where quantity supplied = quantity demanded, taking the number of producers as given

Long-run (all costs become variable) equilibrium when quantity supplied = quantity demanded, given that sufficient … has elapsed for entry into and exit from the industry to occur–new firms enter as long as there is economic … (P > min ATC)

LRS curve is always flatter (more …) than SRS curve

LRS curve slopes … when producers use an input that is limited in supply–as the industry expands, the price of that input goes up, and later entrants have a higher cost structure than early entrants

LRS curve slopes … when an industry faces increasing returns to scale, in which average costs fall as output rises

A … price attracts new entrants in the long-run, raising industry output and lowering price; a … in price induces existing producers to exit in the long-run, reducing industry output and raising price

monopoly, oligopoly, monopolistic competition, perfect competition

4 principal models of market structure: perfect competition, monopoly, oligopoly, monopolistic competition

Based on 2 dimensions: number of firms in market (one, few, many); whether the goods offered are identical or differentiated (goods that are different but considered somewhat substitutable by consumers–ex: laptops, laundry detergent)

...=one producer, identical products

…=few producers, products both differentiated and identical

… …=many producers, differentiated products

… …=many producers, identical products

monopolist, monopoly, market power, supply

Meaning of monopoly

a … a firm that is the only producer of a good with no close substitutes

a … is an industry controlled by a monopolist

… … is the ability of a firm to raise prices–it restricts the … of the good, moving up the demand curve, raising the price

entry, scarce, increasing, fixed, natural, long, network externalities, government-made, monopoly, copyright

For a monopoly to persist, a barrier to … must keep others from going into the same business–5 principal types of barriers to entry:

Control of a … resource or input

… returns to scale: when ATC falls as output increases, firms tend to grow larger—the source of this is large … cost—in such an industry, larger companies are more profitable and drive out smaller ones—monopolies created/sustained by this are called … monopolies–most visible ones are utilities (like water distribution), where duplicating the delivery system would be inefficient

Technological superiority–not a …-term barrier

… …: the value of a good/service to an individual increases as more individuals use the same good or service–the firm with largest network of consumers may become a monopolist

…-… barriers: a patent gives an inventor a temporary … in the use/sale of an invention, and a … gives the creator of a literary or artistic work sole rights to profit from it–the justification for these is a matter of incentives (the law allows a monopoly to exist temporarily by granting property rights that encourage creation)

marginal revenue, marginal cost, total revenue, quantity, highest, average total cost, below, supply

Profit for all firms is maximized at the quantity where … … equals … … (P is not equal to MR for monopolies)

MR is the change in … …, divided by the change in … (negative numbers count)

Graphically:

2 steps:

Choosing a quantity (where MR=MC)--they cross on graph

Choosing a price (… price you can get away with)--where demand curve lines up with optimal quantity

Follow graph to demand curve, which shows how much consumers will pay

Profit is area from the … … … to the price, multiplied by quantity–as long as monopoly has strong barriers to entry, profit will stay

Total cost is the area … this

Monopolies don’t have … curves–they control prices, so there is no set relationship between price and quantity supplied

downward, quantity, first, price, second, below, decrease

Demand curve for monopoly looks normal, … sloping

An increase in production by a monopolist can have 2 opposing effects on revenue:

… effect: one more unit is sold, increased TR by the price at which the unit is sold (dominates for … half of TR curve)

… effect: to sell the last unit, monopolist must cut the market price on all units sold, decreasing the TR (dominates for … half of TR curve)

MR is always … demand curve because of price effect

Monopolist has to … price for each additional unit they sell since demand curve is downward sloping–MR will be lower than the price

inefficiency, losses

Monopolies and public policy

By reducing output and raising prices, monopolists benefit at consumers’ expenses

Monopolies are sources of …–the losses to consumers from monopoly behavior are larger than the gains to the monopolist–leads to net … to society’s welfare

Governments try to prevent/limit monopolies

consumer surplus, producer surplus, below, profit, producer, total, demand, above, below, deadweight loss, total

Monopoly welfare effects

2 entities in economy: consumers, producers–examine their surplus in the economy and how it changes in a monopoly as compared to a perfectly competitive industry

Third entity=government

… …: the difference in the consumer’s maximum willingness to pay for a unit of a good and the price that they pay

… …: difference between minimum price at which a producer would sell a good and the price at which they actually sell it

Graphically:

Perfect competition: consumer surplus is area … demand curve and above price–no … and no … surplus—consumer surplus = … surplus here

Monopoly: producer surplus/profit is area from profit-maximizing quantity up to … curve; consumer surplus is area … producer surplus and … demand curve; … … is the rest of area below demand curve and above price—… surplus falls

reduces, antitrust, value, lower, public ownership, regulation, rises, fall, demand

Public policy response to monopolies

Since monopolies create inefficiencies by raising price and reducing output, total surplus … as compared to perfect competition–governments try to limit or break monopolies (… policies)

If it’s a natural monopoly or network externality industry, bigger is better for consumer–these monopolies provide … for consumers; if neither of these conditions apply, best policy is to prevent monopoly from arising or break it up if it already exist

Natural monopolies–large producer has … ATC’s than small producers and shouldn’t be broken up; 2 policy options: … … (gov establishes a public agency to provide the good and protect consumers’ interests–often works badly because publicly owned companies are often poorly run), or … (a price ceiling imposed on monopolies does not create shortages if it is not set too low–consumer surplus … and profits …–graphically, consumer surplus is area from point where ATC crosses … curve and to the left)

single-price, price discrimination, demand, elasticity, increases, perfect, profit

…-… monopolist: offers its product to all consumers at same price

Some firms practice … … (charge different prices to different consumers for same good)--sell to more than one market, each with its own … curve (ex: senior citizens and young people, business travelers and leisure travelers)

Firms distinguish between groups of consumers on the basis of their price … (ex: business travelers have lower elasticity than nonbusiness travelers)

Price discrimination … sales and profit

… price discrimination–firm will charge each customer at different price, the maximum price each is willing to pay

Firm captures all consumer surplus as …

Ex: haggling at the flea market

advance purchase restrictions, volume discounts, two-part tariffs, sales, outlet stores, digital personalized pricing

Common techniques for price discrimination

… … …: prices are lower for those who purchase well in advance

… …: price is lower if you buy a large quantity

…-… …: customer pays a flat fee upfront, then a per-unit fee on each item purchased

… and … …: holding regular sales such as Black Friday; building an outlet store at a distance from the center of the city

… … …: online retailers gather personal information on shoppers and adjust prices accordingly

monopsony, loss

A … exists when there is only 1 buyer of a good (ex: a single employer in a small town that is hiring workers)

Monopsonists distort the competitive market equilibrium and create deadweight …