Microeconomics Parkin & Bade CH. 11-13 - Custom Scholars
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# Microeconomics Parkin & Bade CH. 11-13

question
Short run
A time frame in which quantities of some resources are fixed; quantities of other resources are variable -- decisions made in the short run can easily be reversed
question
Firm's plant
Fixed resources (like technology, buildings, capital, and management)
question
Long run
A time frame in which quantities of all resources are variable -- decisions made in the long run are not easily reversed
question
Sunk cost
The past cost of buying a new plant (the
firm's decisions depend only on shortrun
cost of changing labour input and longrun
cost of changing plant (sunk costs are
irrelevant))
question
Total product curve (TP)
the maximum attainable output with fixed quantity of capital as the quantity of labour varies
question
Marginal product curve (MP)
the change in TP resulting from a oneunit
increase in variable input
question
Average product curve (AP)
the TP per unit of variable input
question
Increasing marginal returns
As variable input increases, MP increases (Initially, MP increases)
question
Decreasing marginal returns
After reaching a maximum, MP decreases (Eventually, MP decreases)
question
Law of diminishing returns
As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes
question
Total fixed cost
The cost of fixed inputs, this does not change with output
question
Total variable cost
Cost of firm's variable inputs, this changes with output
question
Marginal cost
Change in TC resulting from a one-unit increase in output
question
Average Fixed Cost
the total fixed cost per unit of output
question
Average variable cost
total variable cost per unit of output
question
Long run cost
The cost of production when all inputs and costs are variable
question
Production Function
(The behavior of long-run cost depends on the firm's production function) The relationship between the max output attainable and the quantities of both capital and labour
question
Long-run average cost curve (LRAC)
a planning curve that tells the firm the plant size and quantity of labour to use at each output to minimize cost. It consists of the segments of different shortrun
ATC curves along which average total cost is different
question
Economies of scale
aka increasing returns to scale; the % in the firm's output > the % increase in inputs; the LRAC slopes downward
question
Constant returns to scale
% increase in the firm's output = % increase in inputs; the
LRAC is horizontal
question
Disceconomies of scale
aka decreasing returns to scale; the % increase in the firm's
output < the percentage increase in inputs; LRAC slopes upward
question
Minimum efficient scale
the smallest quantity of output yielding minimum LRAC
question
Price taker
A firm that cannot influence the market price because its production is an insignificant part of the total market
question
Total revenue
Price quantity of output sold (price quantity)
question
Economic profit
Total Revenue - Total Cost
question
Total cost
Opportunity cost of production, which includes normal profit
question
Marginal revenue
Change in total revenue that results from a one-unit increase in the quantity sold
question
What decisions must a firm make to maximize economic profit given its restraints
- How to produce at a minimum cost
- What quantity to produce
- Whether to enter or exit a market
question
Marginal analysis
Compares marginal revenue to marginal cost, an alternative way to find the profit maximizing
output
question
When does a firm maximize profit?
When it produces the quantity at which marginal revenue (price) equals margina lcost
question
When does a firm incur an economic loss?
When price is less than average total cost
question
Economic loss
TFC + (AVC - P) * Q
if AVC > P = firm shut down
if TVC > TR = firm shut down
question
Shutdown point
The price and quantity at which a firm is indifferent btwn producing and shutting down, this is where AVC is at it's minimum and the MC curve crosses the AVC curve -- the firm will incur a loss equal to TFC
question
Short-run market supply curve
Shows the quantity supplied by all firms in the market at each price when each firm's plant and the number of firms remain the same
question
Long-run market supply curve
Shows how the quantity supplied in a market varies as the market price varies after all the possible adjustment have been made, including changes in each firm's plant and the number of firms in the market
question
A firm makes no economic profit (breaks even) when..
Price = ATC
question
A firm makes economic profit when...
Price exceeds ATC
question
A firm incurs an economic loss when...
Price is less than ATC
question
When does a firm exit and industry, and why would a firm enter an indsutry?
A firm exits an industry when they incur an economic loss
A firm enters an industry in which existing firms make an economic profit
question
In the long run, what happens to the market as firms enter the industry
The market price falls until firms are making zero economic profit
question
In the long run, what happens to the market as firms exit the industry?
The price continues to rise until firms make zero economic profit
question
External economies
Factors beyond the control of an individual firm that lower the firm's costs as the industry output increases
question
External diseconomies
Factors beyond the control of a firm that raise the firm's costs as industry output increases
question
When are resources used efficiently
When no one can be made better off without making someone else worse off, MSC = MSB
question
Monopoly
A market with a single firm that produces a good or service for which no close substitute exists and that is protected from competition by a barrier preventing the entry of new
firms and their selling of their good/services
question
Why does a monopoly arise?
No close substitutes, and no barriers of entry
question
What is a natural monopoly?
A market in which economies of scale enable one firm to supply the entire market at the lowest possible cost
question
When does an ownership barrier of entry occur?
If one firm owns a significant portion of the key resources
question
What is a legal monopoly?
A market in which competition and entry are restricted by the granting of a public franchise, government license, or patent/copyright
question
What is a single-price monopoly?
A firm that must sell each unit of its output for the same price to all its consumers
question
What is price discrimination?
The practice of selling different units of a good or service for different prices (Many firms price discriminate, but not all of them are monopoly firms)
question
Why is a monopoly a price setter?
Because the demand for the monopoly's output is market demand
question
Is demand elastic or inelastic in a monopoly?
Demand is always elastic
question
What must a monopoly do to price discriminate?
1) Identify and separate different buyer types, 2) Sell a product that cannot be resold
(Price discrimination is ONLY intentional price differences)
question
When does perfect price discrimination occur?
If a firm is able to sell each unit of output for the highest price anyone is wiling to pay
(MR = Price and Demand Curve = MR Curve)
1 of 55
question
Short run
A time frame in which quantities of some resources are fixed; quantities of other resources are variable -- decisions made in the short run can easily be reversed
question
Firm's plant
Fixed resources (like technology, buildings, capital, and management)
question
Long run
A time frame in which quantities of all resources are variable -- decisions made in the long run are not easily reversed
question
Sunk cost
The past cost of buying a new plant (the
firm's decisions depend only on shortrun
cost of changing labour input and longrun
cost of changing plant (sunk costs are
irrelevant))
question
Total product curve (TP)
the maximum attainable output with fixed quantity of capital as the quantity of labour varies
question
Marginal product curve (MP)
the change in TP resulting from a oneunit
increase in variable input
question
Average product curve (AP)
the TP per unit of variable input
question
Increasing marginal returns
As variable input increases, MP increases (Initially, MP increases)
question
Decreasing marginal returns
After reaching a maximum, MP decreases (Eventually, MP decreases)
question
Law of diminishing returns
As a firm uses more of a variable input with a given quantity of fixed inputs, the marginal product of the variable input eventually diminishes
question
Total fixed cost
The cost of fixed inputs, this does not change with output
question
Total variable cost
Cost of firm's variable inputs, this changes with output
question
Marginal cost
Change in TC resulting from a one-unit increase in output
question
Average Fixed Cost
the total fixed cost per unit of output
question
Average variable cost
total variable cost per unit of output
question
Long run cost
The cost of production when all inputs and costs are variable
question
Production Function
(The behavior of long-run cost depends on the firm's production function) The relationship between the max output attainable and the quantities of both capital and labour
question
Long-run average cost curve (LRAC)
a planning curve that tells the firm the plant size and quantity of labour to use at each output to minimize cost. It consists of the segments of different shortrun
ATC curves along which average total cost is different
question
Economies of scale
aka increasing returns to scale; the % in the firm's output > the % increase in inputs; the LRAC slopes downward
question
Constant returns to scale
% increase in the firm's output = % increase in inputs; the
LRAC is horizontal
question
Disceconomies of scale
aka decreasing returns to scale; the % increase in the firm's
output < the percentage increase in inputs; LRAC slopes upward
question
Minimum efficient scale
the smallest quantity of output yielding minimum LRAC
question
Price taker
A firm that cannot influence the market price because its production is an insignificant part of the total market
question
Total revenue
Price quantity of output sold (price quantity)
question
Economic profit
Total Revenue - Total Cost
question
Total cost
Opportunity cost of production, which includes normal profit
question
Marginal revenue
Change in total revenue that results from a one-unit increase in the quantity sold
question
What decisions must a firm make to maximize economic profit given its restraints
- How to produce at a minimum cost
- What quantity to produce
- Whether to enter or exit a market
question
Marginal analysis
Compares marginal revenue to marginal cost, an alternative way to find the profit maximizing
output
question
When does a firm maximize profit?
When it produces the quantity at which marginal revenue (price) equals margina lcost
question
When does a firm incur an economic loss?
When price is less than average total cost
question
Economic loss
TFC + (AVC - P) * Q
if AVC > P = firm shut down
if TVC > TR = firm shut down
question
Shutdown point
The price and quantity at which a firm is indifferent btwn producing and shutting down, this is where AVC is at it's minimum and the MC curve crosses the AVC curve -- the firm will incur a loss equal to TFC
question
Short-run market supply curve
Shows the quantity supplied by all firms in the market at each price when each firm's plant and the number of firms remain the same
question
Long-run market supply curve
Shows how the quantity supplied in a market varies as the market price varies after all the possible adjustment have been made, including changes in each firm's plant and the number of firms in the market
question
A firm makes no economic profit (breaks even) when..
Price = ATC
question
A firm makes economic profit when...
Price exceeds ATC
question
A firm incurs an economic loss when...
Price is less than ATC
question
When does a firm exit and industry, and why would a firm enter an indsutry?
A firm exits an industry when they incur an economic loss
A firm enters an industry in which existing firms make an economic profit
question
In the long run, what happens to the market as firms enter the industry
The market price falls until firms are making zero economic profit
question
In the long run, what happens to the market as firms exit the industry?
The price continues to rise until firms make zero economic profit
question
External economies
Factors beyond the control of an individual firm that lower the firm's costs as the industry output increases
question
External diseconomies
Factors beyond the control of a firm that raise the firm's costs as industry output increases
question
When are resources used efficiently
When no one can be made better off without making someone else worse off, MSC = MSB
question
Monopoly
A market with a single firm that produces a good or service for which no close substitute exists and that is protected from competition by a barrier preventing the entry of new
firms and their selling of their good/services
question
Why does a monopoly arise?
No close substitutes, and no barriers of entry
question
What is a natural monopoly?
A market in which economies of scale enable one firm to supply the entire market at the lowest possible cost
question
When does an ownership barrier of entry occur?
If one firm owns a significant portion of the key resources
question
What is a legal monopoly?
A market in which competition and entry are restricted by the granting of a public franchise, government license, or patent/copyright
question
What is a single-price monopoly?
A firm that must sell each unit of its output for the same price to all its consumers
question
What is price discrimination?
The practice of selling different units of a good or service for different prices (Many firms price discriminate, but not all of them are monopoly firms)
question
Why is a monopoly a price setter?
Because the demand for the monopoly's output is market demand
question
Is demand elastic or inelastic in a monopoly?
Demand is always elastic
question
What must a monopoly do to price discriminate?
1) Identify and separate different buyer types, 2) Sell a product that cannot be resold
(Price discrimination is ONLY intentional price differences)
question
When does perfect price discrimination occur?
If a firm is able to sell each unit of output for the highest price anyone is wiling to pay
(MR = Price and Demand Curve = MR Curve)

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