Microeconomics Parkin & Bade CH. 11-13

question

Short run

answer

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

answer

Fixed resources (like technology, buildings, capital, and management)

question

Long run

answer

A time frame in which quantities of all resources are variable -- decisions made in the long run are not easily reversed

question

Sunk cost

answer

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)

answer

the maximum attainable output with fixed quantity of capital as the quantity of labour varies

question

Marginal product curve (MP)

answer

the change in TP resulting from a oneunit
increase in variable input

question

Average product curve (AP)

answer

the TP per unit of variable input

question

Increasing marginal returns

answer

As variable input increases, MP increases (Initially, MP increases)

question

Decreasing marginal returns

answer

After reaching a maximum, MP decreases (Eventually, MP decreases)

question

Law of diminishing returns

answer

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

answer

The cost of fixed inputs, this does not change with output

question

Total variable cost

answer

Cost of firm's variable inputs, this changes with output

question

Marginal cost

answer

Change in TC resulting from a one-unit increase in output

question

Average Fixed Cost

answer

the total fixed cost per unit of output

question

Average variable cost

answer

total variable cost per unit of output

question

Long run cost

answer

The cost of production when all inputs and costs are variable

question

Production Function

answer

(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)

answer

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

answer

aka increasing returns to scale; the % in the firm's output > the % increase in inputs; the LRAC slopes downward

question

Constant returns to scale

answer

% increase in the firm's output = % increase in inputs; the
LRAC is horizontal

question

Disceconomies of scale

answer

aka decreasing returns to scale; the % increase in the firm's
output < the percentage increase in inputs; LRAC slopes upward

question

Minimum efficient scale

answer

the smallest quantity of output yielding minimum LRAC

question

Price taker

answer

A firm that cannot influence the market price because its production is an insignificant part of the total market

question

Total revenue

answer

Price quantity of output sold (price quantity)

question

Economic profit

answer

Total Revenue - Total Cost

question

Total cost

answer

Opportunity cost of production, which includes normal profit

question

Marginal revenue

answer

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

answer

- How to produce at a minimum cost
- What quantity to produce
- Whether to enter or exit a market

question

Marginal analysis

answer

Compares marginal revenue to marginal cost, an alternative way to find the profit maximizing
output

question

When does a firm maximize profit?

answer

When it produces the quantity at which marginal revenue (price) equals margina lcost

question

When does a firm incur an economic loss?

answer

When price is less than average total cost

question

Economic loss

answer

TFC + (AVC - P) * Q
if AVC > P = firm shut down
if TVC > TR = firm shut down

question

Shutdown point

answer

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

answer

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

answer

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..

answer

Price = ATC

question

A firm makes economic profit when...

answer

Price exceeds ATC

question

A firm incurs an economic loss when...

answer

Price is less than ATC

question

When does a firm exit and industry, and why would a firm enter an indsutry?

answer

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

answer

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?

answer

The price continues to rise until firms make zero economic profit

question

External economies

answer

Factors beyond the control of an individual firm that lower the firm's costs as the industry output increases

question

External diseconomies

answer

Factors beyond the control of a firm that raise the firm's costs as industry output increases

question

When are resources used efficiently

answer

When no one can be made better off without making someone else worse off, MSC = MSB

question

Monopoly

answer

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?

answer

No close substitutes, and no barriers of entry

question

What is a natural monopoly?

answer

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?

answer

If one firm owns a significant portion of the key resources

question

What is a legal monopoly?

answer

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?

answer

A firm that must sell each unit of its output for the same price to all its consumers

question

What is price discrimination?

answer

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?

answer

Because the demand for the monopoly's output is market demand

question

Is demand elastic or inelastic in a monopoly?

answer

Demand is always elastic

question

What must a monopoly do to price discriminate?

answer

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?

answer

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)
(Deadweight loss is eliminated)

1 of 55

question

Short run

answer

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

answer

Fixed resources (like technology, buildings, capital, and management)

question

Long run

answer

A time frame in which quantities of all resources are variable -- decisions made in the long run are not easily reversed

question

Sunk cost

answer

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)

answer

the maximum attainable output with fixed quantity of capital as the quantity of labour varies

question

Marginal product curve (MP)

answer

the change in TP resulting from a oneunit
increase in variable input

question

Average product curve (AP)

answer

the TP per unit of variable input

question

Increasing marginal returns

answer

As variable input increases, MP increases (Initially, MP increases)

question

Decreasing marginal returns

answer

After reaching a maximum, MP decreases (Eventually, MP decreases)

question

Law of diminishing returns

answer

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

answer

The cost of fixed inputs, this does not change with output

question

Total variable cost

answer

Cost of firm's variable inputs, this changes with output

question

Marginal cost

answer

Change in TC resulting from a one-unit increase in output

question

Average Fixed Cost

answer

the total fixed cost per unit of output

question

Average variable cost

answer

total variable cost per unit of output

question

Long run cost

answer

The cost of production when all inputs and costs are variable

question

Production Function

answer

(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)

answer

question

Economies of scale

answer

aka increasing returns to scale; the % in the firm's output > the % increase in inputs; the LRAC slopes downward

question

Constant returns to scale

answer

% increase in the firm's output = % increase in inputs; the
LRAC is horizontal

question

Disceconomies of scale

answer

aka decreasing returns to scale; the % increase in the firm's
output < the percentage increase in inputs; LRAC slopes upward

question

Minimum efficient scale

answer

the smallest quantity of output yielding minimum LRAC

question

Price taker

answer

A firm that cannot influence the market price because its production is an insignificant part of the total market

question

Total revenue

answer

Price quantity of output sold (price quantity)

question

Economic profit

answer

Total Revenue - Total Cost

question

Total cost

answer

Opportunity cost of production, which includes normal profit

question

Marginal revenue

answer

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

answer

- How to produce at a minimum cost
- What quantity to produce
- Whether to enter or exit a market

question

Marginal analysis

answer

Compares marginal revenue to marginal cost, an alternative way to find the profit maximizing
output

question

When does a firm maximize profit?

answer

When it produces the quantity at which marginal revenue (price) equals margina lcost

question

When does a firm incur an economic loss?

answer

When price is less than average total cost

question

Economic loss

answer

TFC + (AVC - P) * Q
if AVC > P = firm shut down
if TVC > TR = firm shut down

question

Shutdown point

answer

question

Short-run market supply curve

answer

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

answer

question

A firm makes no economic profit (breaks even) when..

answer

Price = ATC

question

A firm makes economic profit when...

answer

Price exceeds ATC

question

A firm incurs an economic loss when...

answer

Price is less than ATC

question

When does a firm exit and industry, and why would a firm enter an indsutry?

answer

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

answer

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?

answer

The price continues to rise until firms make zero economic profit

question

External economies

answer

Factors beyond the control of an individual firm that lower the firm's costs as the industry output increases

question

External diseconomies

answer

Factors beyond the control of a firm that raise the firm's costs as industry output increases

question

When are resources used efficiently

answer

When no one can be made better off without making someone else worse off, MSC = MSB

question

Monopoly

answer

question

Why does a monopoly arise?

answer

No close substitutes, and no barriers of entry

question

What is a natural monopoly?

answer

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?

answer

If one firm owns a significant portion of the key resources

question

What is a legal monopoly?

answer

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?

answer

A firm that must sell each unit of its output for the same price to all its consumers

question

What is price discrimination?

answer

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?

answer

Because the demand for the monopoly's output is market demand

question

Is demand elastic or inelastic in a monopoly?

answer

Demand is always elastic

question

What must a monopoly do to price discriminate?

answer

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?

answer

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)
(Deadweight loss is eliminated)

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Microeconomics Parkin & Bade CH. 11-13

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