# Shared Flashcard Set

## Details

Intermediate Microeconomics 2
Chapters 7-8
21
Economics
03/29/2012

Term
 Cost
Definition
 TC = FC + VC   ATC = TC/q AFC = FC/q AVC = VC/q average cost is the slope of a ray from the origin to the cost curve MC = ΔVC/Δq = ΔTC/Δq marginal cost is the slope of the tangent line on either TC or VC
Term
 In the long run Cost Minimization
Definition
 TC=FC+VC <-- short run   long run we have inputs: labor, capital and each has a cost w-wage rate for labor cost of labor is wL r-rental rate for capital cost of capital is rK
Term
 Iso cost curve
Definition
 every combination of labor and capital on the isocost curve results in the same total cost   slope of curve is -(w/r)
Term
 Cost Minimization in Production, Long Run
Definition
 Cost = rK + wL   Tangency condition: slope of isocost curve (set)= slope of isoquant(quantity produced curve)   -(w/r) = -MRTS -w/r = -MPL/MPk w/r = MPl/MPk
Term
 Identify cost minimizing inputs for q
Definition
 substitute result of tangency condition into the production function for q   ex.) r = 15 w = 5 q = f(K,L) = K^(3/4)L^(1/4)   5/15 = derivative of f plug result into f
Term
 Cost - Output Elasticity
Definition
 (ΔC/C)/(Δq/q)   = MC(1/AC) = (MC/AC)   Eco < 1 - economies of scale Eco > 1 diseconomies of scale
Term
 Economies of Scope and Product Transformation Curve
Definition
 Production of 2 outputs (q,q2)     if concave, economies of scope if convex, diseconomies of scope
Term
 Economies of Scope cont.
Definition
 advantage in producing goods jointly   Scope vs. Scale   scope is producing multiple(different) goods, scale is increasing the scale of production
Term
 Perfect Competition and the Profit Maximizing Decision
Definition
Term
 Perfect Competition
Definition
 1.) Price takers - many firms, no firm has a large market share (q/Q) 2.)Product Homogeniety - "standardized product" all firms produce an identical good to their competitors 3.) Free entry and exit - in the long run there exists no barriers to entering or exiting the industry
Term
 All firms have one goal - Profit Maximization
Definition
 profit : ∏(q) = R(q) - C(q) ∏ - firm level profit   Profit Maximization occurs at MR = MC (marginal revenue = marginal cost   aka when the slopes are equal, NOT when R = C
Term
 Marginal Revenue for a perfectly competitive firm?
Definition
 As a price taker, the perfectly competitive firm has no say on the price. Therefore they are given the price, P. Every time they sell another unit of the good they receive P. Marginal revenue is additional revenue per good, so marginal revenue = P, or the price of the good.
Term
 Price and Revenue for Perfectly Competitive firms
Definition
 TR = P x q (price * quantity) Average revenue(AR) = TR/q = P MR = P     ∏(q) = R(q) - C(q) = (P*q) - C(q)[q/q]) = (P - (C(q)/q))*q =(P-ATC(q))q ∏(q) = (P-ATC(q))q   P > ATC : profitable P = ATC : break even (zero profit) P < ATC : taking a loss(negative profit) break even occurs where MC intersects ATC   (remember P = MC) at minimum ATC
Term
 Threshold b/w Producing and Shutting down
Definition
 where ∏(q) = -FC   C(q) = FC + VC(q)   -FC = R(q) - (FC + VC(q))   = .... P*q = (VC(q)/q) * q P = VC(q)/q means  P = AVC(q)   given of course that the firm is indifferent b/w producing and shutting down
Term
 Price and Cost
Definition
 P= MC - profit max q p > ATC : + profit P < ATC : -profit   AVC < P < ATC : loss in producing < FC   P < AVC : loss in producing > FC -> shut down
Term
 Firm's Short Run Supply
Definition
 it is the MC curve above minimum AVC   firm supply curve: P = MC   market supply: n * MC n = number of firms
Term
 Producer Surplus
Definition
 the difference b/w price received and willingness to sell(marginal cost)  PS = P - MC for each q   meaning with some calculus,    PS = [P - AVC(q*)]q*   ∏(q*) = PS(q*) - FC in the long run, entering and exiting are available to firms if ∏ >0 there will be entry if ∏ < 0 , there will be exits at long run equilibrium, ∏ = 0, P = ATC, P = MC, ATC = MC
Term
 Producer Surplus for the firm in the Short Run
Definition
 PS = (P-AVC)q ∏ = PS- FC PS = ∏ + FC
Term
 Choosing Output in the Long Run
Definition
 Remember, 1.) All costs are variable (TC = VC = C) 2.) Free Entry and Exit   firm at first produces Qsr at P0, but then in the long run, the firm expands production (increase in q) to Qlr (still P0). The existence of profits will cause the industry to expand however, driving the price down to p1, along the LMC curve and LAC curve until MC = AC.    Prices fall until entry stops. This occurs at zero profit ∏ = MC = AC
Term
 Economic Rent
Definition
 what happens when firms have different costs?   the area difference between Plr and Potherfirm = economic rent.   suppose there are N firms in the market "other firm's" profits = TR - VC - FC - Economic rent = 0
Term
 Summary of Rent
Definition
 ∏ = PS - FC  <-short run   in long run, no fixed costs ∏ = PS, in LR equilibrium PS = 0   in the presence of rents we have the added OPPORTUNITY COST of rent.   ∏ = R(q) - C(q) - rent = R(q) - VC - FC - rent  remember PS = R(q) - VC   ∏ = PS-rent   in LR Eq. ∏ = 0 PS = Rent
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