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Mircro Economics Part 2
MIcro
108
Economics
Undergraduate 2
05/04/2009

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Term
What does TFC stand for?
Definition
Total Fixed Costs.
Term
What does TVC stand for?
Definition
Total Variable Costs.
Term
What does TC stand for?
Definition
Total Costs.
Term
TFC+TVC=
Definition
TC
Term
What does AFC stand for?
Definition
Average Fixed Costs.
Term
What does AVC stand for?
Definition
Average Variable Costs.
Term
What does ATC stand for?
Definition
Average Total Costs.
Term
AFC+AVC=
Definition
ATC
Term
Fixed costs/Quantity=
Definition
Average Fixed Costs (AFC)
Term
Variable Costs/Quantity=
Definition
Average Variable Costs.
Term
Total Cost/Quantity=
Definition
Average total cost.
Term
How can average costs be determined?
Definition
By dividing the firm’s costs by the quantity of output it produces.
Term
The average cost is the...
Definition
the cost of each typical unit of product.
Term
What does MC stand for?
Definition
Marginal Costs.
Term
What does marginal costs measure?
Definition
the increase in total cost that arises from an extra unit of production.
Term
What question does Marginal costs help answer?
Definition
How much does it cost to produce an additional unit of output?
Term
MC=
Definition
Change in total cost/change in quantity
Term
What do Economies of Scale refer to?
Definition
the property whereby long-run average total cost falls as the quantity of output increases.
Term
What do diseconomies of scale refer to?
Definition
the property whereby long-run average total cost rises as the quantity of output increases.
Term
What does constant returns to scale refer to?
Definition
the property whereby long-run average total cost stays the same as the quantity of output increases.
Term
How does a firm maximize profit in a perfectly competitive market?
Definition
By producing the quantity at which marginal cost equals marginal revenue.
Term
In PERFECT COMPETITION, Price equals?
Definition
Average revenue and marginal revenue.
Term
In a PERFECTLY COMPETITIVE MARKET, when MR= MC...
Definition
profit is maximized.
Term
In a PERFECTLY COMPETITIVE MARKET, when MR is greater than MC...
Definition
Increase Q.
Term
In a PERFECTLY COMPETITIVE MARKET, when MR is less than MC...
Definition
Decrease Q.
Term
For competitive firms, marginal reveenue equals...
Definition
the price of the good.
Term
What does MC measure?
Definition
the increase in total cost that arises from an extra unit of production.
Term
Change in total cost/change in quantity=
Definition
MC
Term
TR-TC=
Definition
Profit.
Term
(P-ATC)x Q=
Definition
Profit.
Term
In perfect competition, average revenue equals...
Definition
the price of the good.
Term
In a PERFECTLY COMPETITIVE MARKET, the price of the good equals...
Definition
the average revenue.
Term
TC=
Definition
TFC+TVC
Term
What does a shutdown refer to?
Definition
a short-run decision not to produce anything during a specific period of time because of current market conditions.
Term
What does an Exit refer to?
Definition
a long-run decision to leave the market.
Term
The firm shuts down if...
Definition
the revenue it gets from producing is less than the variable cost of production.
Term
if TR < VC
Definition
shutdown
Term
if P < AVC
Definition
shutdown
Term
What are sunk costs?
Definition
costs that have already been committed and cannot be recovered.(fixed costs)
Term
When deciding whether to shut down a firm ignores what?
Definition
Sunk costs(fixed costs)
Term
When deciding whether to exit, what does a firm not ignore?
Definition
Sunk costs (fixed costs)
Term
Are sunk costs ignored when deciding to exit?
Definition
NO
Term
What is a competitive firm's short-run supply curve?
Definition
The portion of the marginal-cost curve that lies above average variable cost
Term
What is the competitive firm's supply curve?
Definition
The MC curve.
Term
In the long run, the firm exits if?
Definition
the revenue it would get from producing is less than its total cost.
Term
if TR < TC
Definition
exit
Term
if TR/Q < TC/Q
Definition
Exit.
Term
if P < ATC
Definition
Exit
Term
The competitive firm’s long-run supply curve is...
Definition
the portion of its marginal-cost curve that lies above average total cost.
Term
Market supply equals...
Definition
the sum of the quantities supplied by the individual firms in the market.
Term
What is the sum of the quantities supplied by the individual firms in the market.
Definition
Market supply
Term
If the industry has 1000 identical firms, then at each market price, industry output will how many times larger than the representative firm’s output?
Definition
1000 times
Term
Firms will enter or exit the market until...
Definition
profit is driven to zero.
Term
Firms entering a perfectly competitive market increase supply leading to...
Definition
Price decline.
Term
In a PERFECTLY COMPETITIVE MARKET, in the long run, price equals...
Definition
the minimum of average total cost.
Term
In a PERFECTLY COMPETITIVE MARKET, the process of entry and exit ends only when...
Definition
P and ATC are driven to equality.
Term
What is the fundamental cause of monopoly?
Definition
Barriers to entry.
Term
Barriers to entry are the fundamental cause of what?
Definition
Monopoly.
Term
What are the three sources of barriers to entry?
Definition
Ownership of a key resource, the government and costs of production.
Term
An industry is a natural monopoly when...
Definition
a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms.
Term
A natural monopoly arises when...
Definition
there are economies of scale.
Term
What type of firms ate price takers?
Definition
Competitive firms.
Term
What type of firm reduces price to increase sales?
Definition
A monopolistic firm.
Term
What type of firm is a price maker?
Definition
Monopoly.
Term
What type of firm faces a horizontal demand curve?
Definition
Perfectly competitive firm.
Term
What type of firm faces a downward sloping demand curve?
Definition
Monopoly.
Term
A monopolist’s marginal revenue is always less than...
Definition
the price of its good
Term
When a monopoly drops the price to sell one more unit...
Definition
the revenue received from previously sold units also decreases.
Term
If a monopoly wants to sell more it must...
Definition
lower its price.
Term
In a monopoly MR is less than...
Definition
P
Term
In a monopolistic market, profit is maximized when
Definition
MC= MR which is less than P
Term
What type of laws allow government to prevent mergers?
Definition
Antitrust laws.
Term
What is price discrimination?
Definition
the business practice of selling the same good at different prices to different customers, even though the costs for producing for the two customers are the same.
Term
Monopolist with Perfect Price Discrimination...
Definition
convert their consumer surplus and deadweight loss into profit.
Term
What is the market structure between perfect competition and monopoly?
Definition
Imperfect competition.
Term
What are the two types of imperfect competition?
Definition
Oligopoly and monopolistic competition.
Term
What is monopolistic competition?
Definition
Many firms selling similar but not identical products.
Term
Is there free entry and exit in monopolistic competition?
Definition
Yes.
Term
Are there many sellers in monopolistic competition?
Definition
Yes.
Term
In monopolistic competition what sort of demand curve is faced?
Definition
A downward sloping demand curve.
Term
In monopolistic competition firms will enter and exit untill...
Definition
Firms are making exactly zero economic profits.
Term
In the long run, there is no excess capacity in...
Definition
perfect competition.
Term
In the long run there is excess capacity in...
Definition
monopolistic competition.
Term
output is less than the efficient scale of perfect competition in what...
Definition
monopolistic competition.
Term
price exceeds marginal cost because the firm has some market power for what type of firm?
Definition
A monopolistically competitive firm.
Term
A firm has the incentive to advertise when...
Definition
firms sell differentiated products and charge prices above marginal cost.
Term
The willingness of a firm to spend advertising dollars can be a signal to consumers about...
Definition
the quality of the product being offered.
Term
What type of firms are interdependent?
Definition
Oligopolistic firms.
Term
What is the key feature of oligopoly?
Definition
The tension between cooperation and self interest.
Term
What is a cartel?
Definition
A group of firms acting in unison.
Term
What is game theory?
Definition
the study of how people behave in strategic situations.
Term
What is a Nash Equilibrium
Definition
One in which each player has chosen its best strategy given the strategy of the other player.
Term
Oligopolistic firms have an incentive to cooperate when...
Definition
games are repeated for an indefinite amount of time.
Term
Perfect information is an assumption of what?
Definition
Perfect competition.
Term
What are the 5 main assumptions of perfectly competitive markets?
Definition
Many buyers and sellers,
Low entry/ exit barriers,
Homogenous products,
Firms aim to maximise profits,
Perfect information
Term
information asymmetries is a source of...
Definition
Market failure.
Term
What is information assymetry?
Definition
a difference in access to relevant knowledge
Term
What does Moral Hazard refer to?
Definition
the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
Term
An agent is...
Definition
a person who is performing an act for another person, called the principal
Term
the principal is...
Definition
a person for whom another person, called an agent, is performing some act.
Term
What is adverse selection?
Definition
a problem that arises in markets where the seller knows more about the attributes of the good being sold than the buyer does. As a result, the buyer runs the risk to be sold a good of low quality.
Term
What is signaling?
Definition
an action taken by an informed party to reveal private information to an uninformed party (advertising, degrees)
Term
What is screeing?
Definition
an action taken by an uniformed party induces an informed party to reveal information (cars, insurance)
Term
What does it take for an action to be an effective signal?
Definition
It needs to be less costly for the person with the higher-quality product.
Term
What is functional income distribution?
Definition
The distribution of income between the owners of the various factors of production. Wages accrue to labour, rent to landlords, and interest, dividends, and retained profits of companies to capital.
Term
What is personal distribution of income?
Definition
The distribution of income related to characteristics such as the level of human capital, his/her abilities, effort, type of work chosen, etc.
Term
What are the two main sources of information asymmetries?
Definition
Hidden action, hidden characteristics.
Term
In what market structure does advertising and branding play a role?
Definition
Monopolistic competition.
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