econ ch. 12

question

perfectly competitive market

answer

many buyers and sellers
identical products
easy market entry and exit

question

perfectly competitive firms

answer

are called price takers because they must take the price given by the market because their influence on price is insignificant

question

total revenue

answer

the product price times the quantity sold

question

average revenue

answer

total revenue divided by the number of units sold

question

marginal revenue

answer

the increase in total revenue resulting from a one-unit increase in sales
(price)

question

profit-maximizing level of output

answer

a firm should always produce at the output where MR = MC

a firms profits equal its total revenues minus its total costs
you want to maximize the difference between total revenue and total cost

question

zero economic profits

answer

total revenue is equal to total cost at q (maximizing output)
(normal rate of return)
total costs include opportunity costs - owners are doing as well as they could elsewhere

question

variable costs

answer

costs that vary with output

*if a firm cannot cover its variable costs, it will have larger losses if it operates that if it shuts down

question

if price is less than average variable cost

answer

the firm should shut down since it is losing even more than its fixed costs by continuing to operate

question

if price is greater than average variable cost but less than average total cost

answer

the firm operates in the short run, but incurs a loss
*it is better to earn enough to cover variable costs and a portion of the fixed costs than to earn nothing at all

question

short-run supply curve

answer

the portion of the MC curve above the AVC curve
*shows the marginal cost of producing at any given output

question

short-run market supply curve

answer

the horizontal summation of the individual firm's supply curves in the market

question

at positive economic profits

answer

more firms will enter or produce more and the supply will move to the right, driving price down

question

economic losses will cause

answer

firms to leave the industry causing higher profits for those who remain

question

only at zero economic profits

answer

will there be no tendency for firms to either enter or leave the industry

question

long-run equilibrium for a competitive firm

answer

equilibrium is achieved when average total costs are minimized (at the lowest point on the curve), all firms earn zero economic profits, short run and long run total costs are equal

question

constant-cost industry

answer

an industry where input prices (and cost curves) do not change as industry output changes

question

increasing-cost industry

answer

an industry where input prices rise (and cost curves rise) as industry output rises

question

decreasing-cost industry

answer

an industry where input prices fall (and cost curves fall) as industry output rises

question

productive efficiency

answer

where a good or service is produced at the lowest possible cost

question

allocative efficiency

answer

where P = MC, and production will be allocated to reflect consumer preferences

question

shutdown point

answer

when your marginal costs are below average variable costs
because at that point you're not even covering variable costs (costs to function), let alone any of your fixed costs

1 of 22

question

perfectly competitive market

answer

many buyers and sellers
identical products
easy market entry and exit

question

perfectly competitive firms

answer

are called price takers because they must take the price given by the market because their influence on price is insignificant

question

total revenue

answer

the product price times the quantity sold

question

average revenue

answer

total revenue divided by the number of units sold

question

marginal revenue

answer

the increase in total revenue resulting from a one-unit increase in sales
(price)

question

profit-maximizing level of output

answer

a firm should always produce at the output where MR = MC

a firms profits equal its total revenues minus its total costs
you want to maximize the difference between total revenue and total cost

question

zero economic profits

answer

total revenue is equal to total cost at q (maximizing output)
(normal rate of return)
total costs include opportunity costs - owners are doing as well as they could elsewhere

question

variable costs

answer

costs that vary with output

*if a firm cannot cover its variable costs, it will have larger losses if it operates that if it shuts down

question

if price is less than average variable cost

answer

the firm should shut down since it is losing even more than its fixed costs by continuing to operate

question

if price is greater than average variable cost but less than average total cost

answer

the firm operates in the short run, but incurs a loss
*it is better to earn enough to cover variable costs and a portion of the fixed costs than to earn nothing at all

question

short-run supply curve

answer

the portion of the MC curve above the AVC curve
*shows the marginal cost of producing at any given output

question

short-run market supply curve

answer

the horizontal summation of the individual firm's supply curves in the market

question

at positive economic profits

answer

more firms will enter or produce more and the supply will move to the right, driving price down

question

economic losses will cause

answer

firms to leave the industry causing higher profits for those who remain

question

only at zero economic profits

answer

will there be no tendency for firms to either enter or leave the industry

question

long-run equilibrium for a competitive firm

answer

equilibrium is achieved when average total costs are minimized (at the lowest point on the curve), all firms earn zero economic profits, short run and long run total costs are equal

question

constant-cost industry

answer

an industry where input prices (and cost curves) do not change as industry output changes

question

increasing-cost industry

answer

an industry where input prices rise (and cost curves rise) as industry output rises

question

decreasing-cost industry

answer

an industry where input prices fall (and cost curves fall) as industry output rises

question

productive efficiency

answer

where a good or service is produced at the lowest possible cost

question

allocative efficiency

answer

where P = MC, and production will be allocated to reflect consumer preferences

question

shutdown point

answer

when your marginal costs are below average variable costs
because at that point you're not even covering variable costs (costs to function), let alone any of your fixed costs

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econ ch. 12

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