Mircro Economics Part 2 Flashcards

Terms Definitions
What does TFC stand for?
Total Fixed Costs.
What does TVC stand for?
Total Variable Costs.
What does TC stand for?
Total Costs.
What does AFC stand for?
Average Fixed Costs.
What does AVC stand for?
Average Variable Costs.
What does ATC stand for?
Average Total Costs.
Fixed costs/Quantity=
Average Fixed Costs (AFC)
Variable Costs/Quantity=
Average Variable Costs.
Total Cost/Quantity=
Average total cost.
How can average costs be determined?
By dividing the firm’s costs by the quantity of output it produces.
The average cost is the...
the cost of each typical unit of product.
What does MC stand for?
Marginal Costs.
What does marginal costs measure?
the increase in total cost that arises from an extra unit of production.
What question does Marginal costs help answer?
How much does it cost to produce an additional unit of output?
Change in total cost/change in quantity
What do Economies of Scale refer to?
the property whereby long-run average total cost falls as the quantity of output increases.
What do diseconomies of scale refer to?
the property whereby long-run average total cost rises as the quantity of output increases.
What does constant returns to scale refer to?
the property whereby long-run average total cost stays the same as the quantity of output increases.
How does a firm maximize profit in a perfectly competitive market?
By producing the quantity at which marginal cost equals marginal revenue.
Average revenue and marginal revenue.
profit is maximized.
In a PERFECTLY COMPETITIVE MARKET, when MR is greater than MC...
Increase Q.
Decrease Q.
For competitive firms, marginal reveenue equals...
the price of the good.
What does MC measure?
the increase in total cost that arises from an extra unit of production.
Change in total cost/change in quantity=
(P-ATC)x Q=
In perfect competition, average revenue equals...
the price of the good.
In a PERFECTLY COMPETITIVE MARKET, the price of the good equals...
the average revenue.
What does a shutdown refer to?
a short-run decision not to produce anything during a specific period of time because of current market conditions.
What does an Exit refer to?
a long-run decision to leave the market.
The firm shuts down if...
the revenue it gets from producing is less than the variable cost of production.
if TR
if P
What are sunk costs?
costs that have already been committed and cannot be recovered.(fixed costs)
When deciding whether to shut down a firm ignores what?
Sunk costs(fixed costs)
When deciding whether to exit, what does a firm not ignore?
Sunk costs (fixed costs)
Are sunk costs ignored when deciding to exit?
What is a competitive firm's short-run supply curve?
The portion of the marginal-cost curve that lies above average variable cost
What is the competitive firm's supply curve?
The MC curve.
In the long run, the firm exits if?
the revenue it would get from producing is less than its total cost.
if TR
if TR/Q
if P
The competitive firm’s long-run supply curve is...
the portion of its marginal-cost curve that lies above average total cost.
Market supply equals...
the sum of the quantities supplied by the individual firms in the market.
What is the sum of the quantities supplied by the individual firms in the market.
Market supply
If the industry has 1000 identical firms, then at each market price, industry output will how many times larger than the representative firm’s output?
1000 times
Firms will enter or exit the market until...
profit is driven to zero.
Firms entering a perfectly competitive market increase supply leading to...
Price decline.
In a PERFECTLY COMPETITIVE MARKET, in the long run, price equals...
the minimum of average total cost.
In a PERFECTLY COMPETITIVE MARKET, the process of entry and exit ends only when...
P and ATC are driven to equality.
What is the fundamental cause of monopoly?
Barriers to entry.
Barriers to entry are the fundamental cause of what?
What are the three sources of barriers to entry?
Ownership of a key resource, the government and costs of production.
An industry is a natural monopoly when...
a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
A natural monopoly arises when...
there are economies of scale.
What type of firms ate price takers?
Competitive firms.
What type of firm reduces price to increase sales?
A monopolistic firm.
What type of firm is a price maker?
What type of firm faces a horizontal demand curve?
Perfectly competitive firm.
What type of firm faces a downward sloping demand curve?
A monopolist’s marginal revenue is always less than...
the price of its good
When a monopoly drops the price to sell one more unit...
the revenue received from previously sold units also decreases.
If a monopoly wants to sell more it must...
lower its price.
In a monopoly MR is less than...
In a monopolistic market, profit is maximized when
MC= MR which is less than P
What type of laws allow government to prevent mergers?
Antitrust laws.
What is price discrimination?
the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
Monopolist with Perfect Price Discrimination...
convert their consumer surplus and deadweight loss into profit.
What is the market structure between perfect competition and monopoly?
Imperfect competition.
What are the two types of imperfect competition?
Oligopoly and monopolistic competition.
What is monopolistic competition?
Many firms selling similar but not identical products.
Is there free entry and exit in monopolistic competition?
Are there many sellers in monopolistic competition?
In monopolistic competition what sort of demand curve is faced?
A downward sloping demand curve.
In monopolistic competition firms will enter and exit untill...
Firms are making exactly zero economic profits.
In the long run, there is no excess capacity in...
perfect competition.
In the long run there is excess capacity in...
monopolistic competition.
output is less than the efficient scale of perfect competition in what...
monopolistic competition.
price exceeds marginal cost because the firm has some market power for what type of firm?
A monopolistically competitive firm.
A firm has the incentive to advertise when...
firms sell differentiated products and charge prices above marginal cost.
The willingness of a firm to spend advertising dollars can be a signal to consumers about...
the quality of the product being offered.
What type of firms are interdependent?
Oligopolistic firms.
What is the key feature of oligopoly?
The tension between cooperation and self interest.
What is a cartel?
A group of firms acting in unison.
What is game theory?
the study of how people behave in strategic situations.
What is a Nash Equilibrium
One in which each player has chosen its best strategy given the strategy of the other player.
Oligopolistic firms have an incentive to cooperate when...
games are repeated for an indefinite amount of time.
Perfect information is an assumption of what?
Perfect competition.
What are the 5 main assumptions of perfectly competitive markets?
Many buyers and sellers,Low entry/ exit barriers,Homogenous products,Firms aim to maximise profits,Perfect information
information asymmetries is a source of...
Market failure.
What is information assymetry?
a difference in access to relevant knowledge
What does Moral Hazard refer to?
the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
An agent is...
a person who is performing an act for another person, called the principal
the principal is...
a person for whom another person, called an agent, is performing some act.
What is adverse selection?
a problem that arises in markets where the seller knows more about the attributes of the good being sold than the buyer does. As a result, the buyer runs the risk to be sold a good of low quality.
What is signaling?
an action taken by an informed party to reveal private information to an uninformed party (advertising, degrees)
What is screeing?
an action taken by an uniformed party induces an informed party to reveal information (cars, insurance)
What does it take for an action to be an effective signal?
It needs to be less costly for the person with the higher-quality product.
What is functional income distribution?
The distribution of income between the owners of the various factors of production. Wages accrue to labour, rent to landlords, and interest, dividends, and retained profits of companies to capital.
What is personal distribution of income?
The distribution of income related to characteristics such as the level of human capital, his/her abilities, effort, type of work chosen, etc.
What are the two main sources of information asymmetries?
Hidden action, hidden characteristics.
In what market structure does advertising and branding play a role?
Monopolistic competition.
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