Econ (ch7-10)

question

Firm

answer

economic institution that transforms inputs, or factors of production, into outputs or products

question

Sole proprietorship

answer

composed of one owner, who usually supervises the business operation

question

Partnership

answer

similar to sole proprietorships except that they have more than one owner

question

Corporations

answer

business structure that has most of the legal rights of individuals, and in addition, can issue stock to raise capital. Stockholders' liability is limited to the value of their stock

question

Profit

answer

the difference between total revenue and total cost

question

Total cost

answer

includes both out-of-pocket expenses and opportunity costs

question

Economic costs

answer

the sum of explicit and implicit costs

question

Explicit costs

answer

those expenses paid directly to come other economic entity

question

Implicit costs

answer

all of the opportunity costs of using resources that belong to the firm

question

Sunk costs

answer

cost that have already been incurred and cannot be recovered

question

Accounting profit

answer

calculated by including only explicit costs

question

Economic profit

answer

calculated using both explicit and implicit costs

question

Normal profit

answer

wich occurs when economic profit equals zero

question

Short run

answer

a period of time over which at least one factor of production is fixed, or cannot be changed

question

Long run

answer

a period of time sufficient for a firm to adjust all factors of production, including plant capacity

question

Production

answer

is the process of turning inputs into outputs

question

Marginal product

answer

the change in output that results from a change in labor input

question

Average product

answer

dividing total output by the number of workers employed to product that output

question

Diminishing marginal returns

answer

each addition worker adds to total output, but at a diminishing rate

question

Fixed costs

answer

those cost that do not change as a firm's output expands or contracts

question

Variable costs

answer

fluctuate as output changes

question

Marginal costs

answer

the change in total cost arising from the production of additional units of output.
MC=changeTC/changeOutput

question

Average fixed costs

answer

total fixed costs / output

question

Average variable costs

answer

total variable costs / output

question

Average total cost

answer

AFC + AVC

question

Long-run average total cost

answer

curve represents the lowest unit cost at which any specific output can be produced in the long run, when a firm is able to adjust the size of its plant

question

Economies of scale

answer

a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques

question

Constant returns to scale

answer

a range of output where average total costs are relatively constant. The expansion of fast-food restaurant franchises and movie theaters, which are essentially replications of existing franchises an theaters, reflect this

question

Diseconomies of scale

answer

a range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently

question

Economies of scope

answer

by producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs

question

Marginal revenue

answer

the change in total revenue that results from the sale of one additional unit of a product

question

Profit maximizing rule

answer

a firm maximizes profit by continuing to produce and sell output until marginal revenue equals marginal cost

question

Normal profits

answer

equal to zero economic profits where P=ATC

question

Short-run supply curve

answer

equivalent to the MC curve above the minimum point on the AVC curve

question

Increasing cost industry

answer

an industry that, in the long run, faces high prices and costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing high costs in the long run

question

Decreasing cost industry

answer

faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the result of technological advances

question

Constant cost industries

answer

some industries seem to expand in the long run without significant change in average cost

question

Monopoly

answer

one-firm industry with no close product substitutes and with substantial barriers to entry

question

Market power

answer

a firms ability to set prices for goods and services in a market

question

Barriers to entry

answer

any obstacle that makes it more difficult for a firm to enter an industry, and includes control of a key resource, prohibitive fixed costs and government protection

question

Rent seeking

answer

resources expended to protect a monopoly position. These are used for such activities as lobbying, extending patents, and restricting the number of licenses permitted

question

X-inefficiency

answer

protected from competitive pressures, monopolies do not have to act efficiently. Spending on corporate jets, travel, and other perks of business represents x-inefficiency

question

Price discrimination

answer

charging different consumer groups different prices for the same product

question

Perfect price discrimination (1st degree)

answer

charging each customer the maximum price each is willing to pay, thereby expropriating all consumer surplus

question

Second-degree price discrimination

answer

charging different customers different prices based on the quantities of the product they purchase

question

third-degree price discrimination

answer

charging different groups of people different prices based on varying elasticities of demand

question

Natural monopoly

answer

an industry exhibiting large economies of scale such that the minimum efficient scale of operations is roughly equal to market demand

question

Marginal cost pricing rule

answer

regulators would prefer to have natural monopolists price where P=MC, but this would result in losses because ATC>MC. Thus, regulators often must use an average cost pricing rule

question

Average cost pricing rule

answer

requires a related monopolist to produce and sell output where price equals average total costs

question

Rate of return

answer

allows a firm to price its product in such a way that it can earn a normal return on capital invested

question

Price caps

answer

place maximum limits on the prices firms can charge for products

question

Antitrust laws

answer

goal is to preserve competition and prevent monopolies with their maximum market power from arising in the first place

question

Concentration ratio

answer

the share of industry shipments or sales account for by the top four or eight firms

question

Herfindahl-Hirschman index (HHI)

answer

a way of measuring industry concentration, equal to the sum of the squares of market shares for all firms in the industry

question

Contestable markets

answer

markets that look monopolistic but where entry costs are so low that the sheer threat of entry keeps prices low

question

Monopolistic competition

answer

a market structure with a large number of firms producing differentiated products. This differentiation is either real or imagined by consumers and involves innovations, advertising, location, or other ways of making one's firm product different from that of its competitors

question

Product differentiation

answer

one firm's product is distinguished from another's through advertising, innovation, location, and so on.

question

Oligopoly

answer

a market with just a few firms dominating the industry where (1) each firm recognizes that it must consider its competitors' reactions when making its own decisions (mutual interdependence) and (2) there are significant barriers to entry into the market

question

Mutual interdependence

answer

when only a few firms constitute an industry, each firm must consider the reactions of its competitors to its decisions

question

Cartel

answer

an agreement between firms (or countries) in an industry to formally collude on price and output, then agree on the distribution of production

question

Kinked demand curve

answer

an oligopoly model that assumes that if a firm raises its price, competitors will not raise their; but if the firm lowers its price, all of its competitors will lower their price to match the reduction. This leads to a kink in the demand curve and relatively stable market prices

question

Game theory

answer

the study of how individuals and firms make strategic decisions to achieve their goals when other parties or factors can influence that outcome

question

Simultaneous-move games

answer

games in which players' actions occur at the same time, forcing players to make decisions without knowing how the other players will act. These games are analyzed using diagrams called game tables

question

Sequential-move games

answer

games in which players make moves one at a time, allowing players to view the progression of the game and to make decision based on previous moves

question

Nash equilibrium

answer

an outcome that occurs when all players choose their optimal strategy in response to all other players' potential moves. At a Nash equilibrium, no player can be better of by unilaterally deviating from the noncooperative outcome

question

Dominant strategy

answer

occurs when a player chooses the same strategy regardless of wha this or her opponent chooses

question

Prisoner's dilemma

answer

a noncooperative game in which players cannot communicate or collaborate in making their decisions, which results in inferior outcomes for both players. Many oligopoly decisions can be framed as a Prisoners dilemma

question

Trigger strategies

answer

action is taken contingent on your opponent's past decisions

question

Tit-for-tat strategies

answer

a trigger strategy that rewards cooperation and punishes defections. If your opponent lowers its price, you do the same. If your opponent returns to a cooperative strategy, you do the same.

1 of 69

question

Firm

answer

economic institution that transforms inputs, or factors of production, into outputs or products

question

Sole proprietorship

answer

composed of one owner, who usually supervises the business operation

question

Partnership

answer

similar to sole proprietorships except that they have more than one owner

question

Corporations

answer

business structure that has most of the legal rights of individuals, and in addition, can issue stock to raise capital. Stockholders' liability is limited to the value of their stock

question

Profit

answer

the difference between total revenue and total cost

question

Total cost

answer

includes both out-of-pocket expenses and opportunity costs

question

Economic costs

answer

the sum of explicit and implicit costs

question

Explicit costs

answer

those expenses paid directly to come other economic entity

question

Implicit costs

answer

all of the opportunity costs of using resources that belong to the firm

question

Sunk costs

answer

cost that have already been incurred and cannot be recovered

question

Accounting profit

answer

calculated by including only explicit costs

question

Economic profit

answer

calculated using both explicit and implicit costs

question

Normal profit

answer

wich occurs when economic profit equals zero

question

Short run

answer

a period of time over which at least one factor of production is fixed, or cannot be changed

question

Long run

answer

a period of time sufficient for a firm to adjust all factors of production, including plant capacity

question

Production

answer

is the process of turning inputs into outputs

question

Marginal product

answer

the change in output that results from a change in labor input

question

Average product

answer

dividing total output by the number of workers employed to product that output

question

Diminishing marginal returns

answer

each addition worker adds to total output, but at a diminishing rate

question

Fixed costs

answer

those cost that do not change as a firm's output expands or contracts

question

Variable costs

answer

fluctuate as output changes

question

Marginal costs

answer

the change in total cost arising from the production of additional units of output.
MC=changeTC/changeOutput

question

Average fixed costs

answer

total fixed costs / output

question

Average variable costs

answer

total variable costs / output

question

Average total cost

answer

AFC + AVC

question

Long-run average total cost

answer

curve represents the lowest unit cost at which any specific output can be produced in the long run, when a firm is able to adjust the size of its plant

question

Economies of scale

answer

a firm's output increases, its LRATC tends to decline. This results from specialization of labor and management, and potentially a better use of capital and complementary production techniques

question

Constant returns to scale

answer

question

Diseconomies of scale

answer

a range of output where average total costs tend to increase. Firms often become so big that management becomes bureaucratic and unable to control its operations efficiently

question

Economies of scope

answer

by producing a number of products that are interdependent, firms are able to produce and market these goods at lower costs

question

Marginal revenue

answer

the change in total revenue that results from the sale of one additional unit of a product

question

Profit maximizing rule

answer

a firm maximizes profit by continuing to produce and sell output until marginal revenue equals marginal cost

question

Normal profits

answer

equal to zero economic profits where P=ATC

question

Short-run supply curve

answer

equivalent to the MC curve above the minimum point on the AVC curve

question

Increasing cost industry

answer

an industry that, in the long run, faces high prices and costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing high costs in the long run

question

Decreasing cost industry

answer

faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the result of technological advances

question

Constant cost industries

answer

some industries seem to expand in the long run without significant change in average cost

question

Monopoly

answer

one-firm industry with no close product substitutes and with substantial barriers to entry

question

Market power

answer

a firms ability to set prices for goods and services in a market

question

Barriers to entry

answer

any obstacle that makes it more difficult for a firm to enter an industry, and includes control of a key resource, prohibitive fixed costs and government protection

question

Rent seeking

answer

resources expended to protect a monopoly position. These are used for such activities as lobbying, extending patents, and restricting the number of licenses permitted

question

X-inefficiency

answer

protected from competitive pressures, monopolies do not have to act efficiently. Spending on corporate jets, travel, and other perks of business represents x-inefficiency

question

Price discrimination

answer

charging different consumer groups different prices for the same product

question

Perfect price discrimination (1st degree)

answer

charging each customer the maximum price each is willing to pay, thereby expropriating all consumer surplus

question

Second-degree price discrimination

answer

charging different customers different prices based on the quantities of the product they purchase

question

third-degree price discrimination

answer

charging different groups of people different prices based on varying elasticities of demand

question

Natural monopoly

answer

an industry exhibiting large economies of scale such that the minimum efficient scale of operations is roughly equal to market demand

question

Marginal cost pricing rule

answer

regulators would prefer to have natural monopolists price where P=MC, but this would result in losses because ATC>MC. Thus, regulators often must use an average cost pricing rule

question

Average cost pricing rule

answer

requires a related monopolist to produce and sell output where price equals average total costs

question

Rate of return

answer

allows a firm to price its product in such a way that it can earn a normal return on capital invested

question

Price caps

answer

place maximum limits on the prices firms can charge for products

question

Antitrust laws

answer

goal is to preserve competition and prevent monopolies with their maximum market power from arising in the first place

question

Concentration ratio

answer

the share of industry shipments or sales account for by the top four or eight firms

question

Herfindahl-Hirschman index (HHI)

answer

a way of measuring industry concentration, equal to the sum of the squares of market shares for all firms in the industry

question

Contestable markets

answer

markets that look monopolistic but where entry costs are so low that the sheer threat of entry keeps prices low

question

Monopolistic competition

answer

question

Product differentiation

answer

one firm's product is distinguished from another's through advertising, innovation, location, and so on.

question

Oligopoly

answer

question

Mutual interdependence

answer

when only a few firms constitute an industry, each firm must consider the reactions of its competitors to its decisions

question

Cartel

answer

an agreement between firms (or countries) in an industry to formally collude on price and output, then agree on the distribution of production

question

Kinked demand curve

answer

question

Game theory

answer

the study of how individuals and firms make strategic decisions to achieve their goals when other parties or factors can influence that outcome

question

Simultaneous-move games

answer

games in which players' actions occur at the same time, forcing players to make decisions without knowing how the other players will act. These games are analyzed using diagrams called game tables

question

Sequential-move games

answer

games in which players make moves one at a time, allowing players to view the progression of the game and to make decision based on previous moves

question

Nash equilibrium

answer

question

Dominant strategy

answer

occurs when a player chooses the same strategy regardless of wha this or her opponent chooses

question

Prisoner's dilemma

answer

question

Trigger strategies

answer

action is taken contingent on your opponent's past decisions

question

Tit-for-tat strategies

answer

a trigger strategy that rewards cooperation and punishes defections. If your opponent lowers its price, you do the same. If your opponent returns to a cooperative strategy, you do the same.

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Econ (ch7-10)

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