Term
| What is the equation that represents the point of maximum utility? |
|
Definition
|
|
Term
| Is the marginal utility curve concave or convex? |
|
Definition
|
|
Term
|
Definition
| What do the fixed, variable & total cost graphs look like? |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
| what happens to average fixed costs over time? |
|
Definition
|
|
Term
| what happens to average variable costs over time? |
|
Definition
| at first you get economies of scale and they decrease, then are constant for a bit, and then the company gets too large and there are inefficiences and average variable costs go up |
|
|
Term
| what happens to average total costs over time |
|
Definition
| Average total cost = sum of average fixed cost (declining) and average variable cost (U shaped), so ends up being U-shaped (looks like a smile) |
|
|
Term
| what happens to marginal costs over time? Where does the MC curve cross the ATC and AVC curves? |
|
Definition
| Marginal costs are the cost of the next unit and so depend on what's happening w/variable costs. Since variable costs eventually suffer inefficiencies andrise, so do marginal costs. MC curve has its low near the orgin (before ATC and AVC reach their lows); it crosses these other two curves at their lowest point |
|
|
Term
| What is the law of diminishing returns? does it apply to supply or demand? |
|
Definition
| Applies to supply (there's the law of diminishing marginal utility for demand). This law says that because variable costs eventually begin to rise because of dis-economies of scale, returns eventually diminish as your company grows larger |
|
|
Term
| What are the characteristics of a perfectly competitive market? |
|
Definition
| 1. |
A large number of independent buyers and sellers, each of which is too small to separately affect the price of a commodity. |
| 2. |
All firms sell homogeneous products or services. |
| 3. |
Firms can enter or leave the market easily. |
| 4. |
Resources are completely mobile. |
| 5. |
Buyers and sellers have perfect information. |
| 6. |
Government does not set prices. |
|
|
|
Term
| In a perfectly competitive market, where is profit maximized? |
|
Definition
Where MC = MR.
Remember that MR "curve" is a horizontal line--no differences in price regardless of quanity produced. MC curve is upward sloping. At the point of intersection, ATC & AVC are at their lowest, so profit is highest. |
|
|
Term
| What happens to the prices of goods in a perfectly competitive market in the long term? |
|
Definition
| . |
When firms in a perfectly competitive market are making profit in the short-run, in the long-run more firms will enter the market. As more firms enter the market, supply (output) increases and the market price will fall until all firms just break even. When firms in a perfectly competitive market are suffering losses in the short-run, some of the firms will exit the market, causing the market price to increase until all firms just break even. Therefore, in a perfectly competitive market there are no long-run economic profits. |
| B. |
Because demand price and marginal revenue are the same, long-run equilibrium occurs where marginal revenue, marginal cost and the lowest long-run average cost intersect. |
|
|
|
Term
| Are firms in a perfectly competite market "price takers" or "price makers"? |
|
Definition
|
|
Term
| What is the shape of the demand curve for a firm in a perfectly competitive market? |
|
Definition
The demand curve faced by a single firm in a perfectly competitive market is a straight horizontal line originating at the price set by the market (of all firms). |
|
|
Term
| When will a firm in a perfectly competitive market shut down? |
|
Definition
|
|
Term
| What are the characteristics of a monopoly? Why do monopolies arise? |
|
Definition
| 1. |
A single seller. |
| 2. |
A commodity for which there are no close substitutes. |
| 3. |
Restricted entry into the market.
Monopolies arise because of control over limited raw materials or patents, becauseof gov't restrictions, or b/c there are such massive increasing returns to scale (natural monopoly)
|
|
|
|
Term
| At what point does a monopoly set its price? Do prices in monopolies tend to rise or fall? |
|
Definition
A monopoly sets its price where MR = MC.
Prices in a monoply tend to DECREASE b/c the demand curve is dowward sloping--to sell more the firm has to lower its price. |
|
|
Term
| When is profit maximized in a monopoly? |
|
Definition
|
|
Term
| What does the supply demand graph look like for a monopoly? |
|
Definition
|
|
Term
| How can a monopoly improve its profits? |
|
Definition
| Reduce costs, or increase demand thru advertising |
|
|
Term
| What is a natural monopoly? |
|
Definition
| One that exists because of increasing economies of scale |
|
|
Term
| When a monopolistic firm produces at the quantity that maximizes revenue, will the firm use resources efficiently or inefficiently and will its price be higher or lower than in a competitive environment? |
|
Definition
| Inefficient & higher price |
|
|
Term
| In a perfect monopoly, which one of the following describes the relationship between the marginal revenue curve and the demand curve? |
|
Definition
| In a perfect monopoly market structure, the marginal revenue curve is below the demand curve and the curves diverge as the quantity increases. The basic reason for the relationship is that, facing a downward sloping demand curve, the firm must continuously lower its selling price in order to sell more units; therefore, marginal revenue must be below demand. |
|
|
Term
| what are the characteristics of firms in monopolistic competition? |
|
Definition
1. A large number of sellers.
2. Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes.
3. Firms can enter or leave the market easily |
|
|
Term
| What is the shape & characteristics of a demand curve in monopolistic competition? Explain |
|
Definition
| downward sloping b/c of product differentiation & highly elastic b/c of existence of close substitutes |
|
|
Term
| Point of profit maximization in monopolistic competition? |
|
Definition
| MR = MC, as long as P > AVC |
|
|
Term
| what happens over the long run when firms are in monopolistic competition? |
|
Definition
| If firms in a monopolistic competitive environment experience short-run profits, in the long-run more firms will enter the industry. More firms in the industry result in a lower demand curve for each firm. Equilibrium will result where the demand curve becomes tangential to the average cost curve and each firm just breaks even. Conversely, if firms are experiencing losses in the long run, firms will leave the industry and the demand curve will shift up so that remaining firms just break even. |
|
|
Term
| Are firms in monopolistic competition efficient or inefficient & why? |
|
Definition
| Inefficient...plants smaller than optimal so cannot maximize economies of scale and equilibrium price tends to be > marginal cost of production |
|
|
Term
| Under Monopolistic Competition what determines whether a firm makes a profit or not? |
|
Definition
| Price relative to Average Total Cost. Profit if P > ATC |
|
|
Term
| What profit outcomes are possible in the short run and in the long run under monopolistic competition? |
|
Definition
| Short run can lose $, profit, or break even, but in the long run firms will always break even |
|
|
Term
| What are the characteristics of firms in an oligopoly? |
|
Definition
1. A few sellers
2. Firms sell either a homogeneous product (standardized oligopoly) or a differentiated product (differentiated oligopoly)
3. Restricted entry into the market. |
|
|
Term
| Describe the interrelationships of firms in an oligopoly. |
|
Definition
Tend to affect each other. One firm lowering prices (especially) leads to other firms lowering prices; in the extreme this leads to a "price war."
Because of the issues with prices firms tend to compete on things other than price such as service or quality |
|
|
Term
| distinguish between overt & tacit collusion? which is/are illegal in the US? |
|
Definition
| Overt collusion = "cartel," illegal in US (price fixing). Tacit collusion is when firms follow the price leader in the industry and is not illegal |
|
|
Term
| In the short run and in the long run, what profit outcomes are possible for firms in an oligopoly? |
|
Definition
| In the short run, there can be any outcome (loss, profit, breakeven). In the long run there tends to be PROFIT b/c firms that can't get their costs down will drop out and there are barriers to entry to the industry. |
|
|
Term
| At what point do firms in an oligopoly set their price? |
|
Definition
|
|
