# Shared Flashcard Set

## Details

Final Exam Material
N/A
53
Economics
07/20/2010

Term
 Why are short-run unit cost curves u-shaped?
Definition
 because of Diminishing Marginal Returns   at first, productivity (MPL APL) increases, and the decreases at the point of DMR   because in the short-run, some inputs are fixed
Term
 what does a short-run unit cost curve with marginal cost and average total cost look like?
Definition
 [image]
Term
 how does the Marginal Product of Labor and Average Product of Labor compare to the graph of Marginal Cost and and Average Total Cost?   Explain
Definition
 [image]     the peak of productivity is the minimum marginal cost
Term
 the maximum of the Marginal Product of Labor curve is the ....
Definition
 minimum of the Marginal Cost curve
Term
 The maximum of the Average Product of Labor curve is ...
Definition
 the minimum of the Average Total Cost curve
Term
 general rule:   when a constant is divided by something decreasing....
Definition
 the result must increase
Term
 How are productivity measures and unit cost measures related?
Definition
 inversely
Term
 what measures are key to unit cost measures?
Definition
 - Marginal Cost - Average Total Cost - Average Variable Cost
Term
 what does the graph of unit costs look like?
Definition
 [image]
Term
 On the Unit Cost Curve graph, where is Average Fixed Cost ?
Definition
 [image]
Term
 What shape are long-run productivity curves?
Definition
 they might be u-shaped
Term
 what do long-run productivity costs involve?
Definition
 it measures what happens to output when more of ALL inputs are used
Term
 what happens to output as we change the size or "scale" of the firm?
Definition
 as a firm gets bigger (more output, larger size), efficiency and productivity might increase (unit costs decrease)   this is Increasing Returns to Scale
Term
 what is Increasing Returns to Scale?
Definition
 as a firm gets bigger (more output, larger size), efficiency and productivity increase (unit costs decrease)
Term
 What are reasons for Increasing Returns to Scale?
Definition
 1) Specialization of labor and management (increase in employees) 2) large output justifies spending on new technology 3) inputs can be purchased in bulk for discounts 4) by-product can be recycled, re-used, sold, etc.
Term
 With Incrasing Returns to Scale   increase in the size of the firm leads to...
Definition
 increase in efficiency   decrease unit costs
Term
 With Increasing Returns to Scale   if you increase all inputs by 50%, output will...
Definition
 output will increase by MORE THAN 50%
Term
 Explain Decreasing Returns to Scale
Definition
 when a firm gets too big, and further increase results in a decrease in efficiency and an increase in unit costs
Term
 What are the reasons for Decreasing Returns to Scale?
Definition
 1) Corporate heirarchy (management layers) is too thick that decision-making is slow   2) lack of labor oversight/shirking
Term
 With Decreasing Returns to Scale   an increase in the size of a firm results in...
Definition
 decrease in efficiency   increase  in unit costs
Term
 With Decreasing Returns to Scale   if you increase the use of all inputs by 50%...   output will...
Definition
 increase by less than 50%
Term
 When does Constant Returns to Scale occur?
Definition
 when you increase the size of the firm and there is - no change in efficiency - no change in unit costs
Term
 What does a firm's long-run Unit Cost Curve graph look like?   IRTS, CRTS, DRTS
Definition
 [image]
Term
 What is perfect competition?
Definition
 when there are many, many small firms selling a standardized product in an environment characterized by "free" entry and exit and "free" information
Term
 what is a standardized product?   and when is it necessary?
Definition
 all firms' products are exactly the same and are perfect substitutes for each other   necessary for perfect competition
Term
 what does "free" refer to?
Definition
 few barriers
Term
 in Perfect Competition   what does the demand curve look like for the whole market and a single firm?
Definition
 [image]
Term
 what is a price taker?
Definition
 the market determines the price each firm will accept
Term
 in Perfect Competition   a firm's demand curve is the same as it's
Definition
 Marginal Revenue curve   This is the only time when demand is perfectly elastic   P* = Marginal Revenue
Term
 Why can't a perfectly competitive firm increase price?
Definition
 because there are so many substitutes   any Price above P* results in Quantity Demanded = 0
Term
 Why shouldn't a perfectly competitive firm lower price?
Definition
 no reason to because they can sell any Quantity Demanded at P*
Term
 What is the general rule for production?
Definition
 if Marginal Revenue > Marginal Cost = PRODUCE!   or   Produce up to where Marginal Revenue = Marginal Cost
Term
Definition
Term
 For the Perfect Competition   What is the Profit Maximizing Rule?
Definition
 Q* is where Price = Marginal Cost
Term
 For Perfect Competition firms we know that P* is...
Definition
 Marginal Revenue
Term
 Which 3 lines have the same slope?
Definition
 slope of the tangent line to Total Cost   slope Total Cost at Profit Maximizing   slope of Total Revenue
Term
 For firms, what is the formula for Profit?
Definition
 Profit = Q* (Profit - Average Total Cost)
Term
 Where is Profit on the Cost graph?
Definition
 [image]
Term
 where is Total Cost on the Cost graph?
Definition
 [image]
Term
 Long-Run Competitive Equilibrium
Definition
 Under Perfect Competition the market will eventually reach a point where firms have no reason to exit and new firms have no reason to join.   number and size of firms is stable
Term
 In the long-run   if economic profit > 0   firms will...
Definition
 enter the market, increasing Supply (shift right)   this will decrease P* until P* = ATC   economic profie = 0, firms will stop entering market
Term
 In the long-run...   if economic profit < 0   firms will...
Definition
 exit, decreasing Supply (shift left) until P* = ATC   economic profit = 0 so firms stop leaving
Term
 In Long-Run Competitive Equilibrium...   Regardless of positive or negative economic proft, what eventually happens?
Definition
 economic profit = 0 and P* = ATC (minimum)
Term
 What does the graph of Long-Run Competitive Equilibrium look like?
Definition
 [image]
Term
 What do you do when P* < Average Variable Cost?
Definition
 produce nothing, "shut down"   in the short-run the best you can do is a loss   if you don't you spend more money than is coming in
Term
 If P* is above minimum AVC, how do you find out Q*?
Definition
 you "bounce" price off of the Marginal Cost curve   Marginal Cost curve is the same as the Supply curve
Term
 What is a monopoly?
Definition
 when there is a single seller of a unique product   there are no close substitutes
Term
 what is a monopolists strategy?
Definition
 restrict supply   stimulate demand via advertising
Term
 What are the 3 barriers to Entry in a Monopolist Market?
Definition
 1) Economic barriers 2) Legal Barriers 3) Technological barriers
Term
 what are economic barriers?
Definition
 a) ownership of resource supply (diamonds)   b) large scale cost advantage -IRTS and a network for providing a good/service -AT&T and beginning a phone service; huge initial cost and after that marginal cost is very low
Term
 Why would a government grand a monopoly?
Definition
 it is more efficient (lower costs) to have one network   they also regulate based on "fairness"
Term
 What are legal barriers?
Definition
 a) patents - exclusive rights to produce and sell a good   b) government licenses - taxi cabs, NC liquor, NC lottery
Term
 What are technological barriers?
Definition
 a) technological superiority - (short-lived) - IBM in the beginning; Xerox machines   b) technology may create a natural monolopy ex) operating systems
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