Econ (ch7-10) - Custom Scholars
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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
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.

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