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ECON1010 > Week 5 > Flashcards

Week 5 Flashcards

1
Q

What is the objective of firms?

A

To maximise profit

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2
Q

What is the formula for profit?

A

TR - TC

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3
Q

To maximise profit, firms should produce quantity of output where the difference between TR and TC is …

A

the greatest

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4
Q

What is the formula for Average Revenue?

A

TR / Q

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5
Q

Average Revenue is equal to what?

A

Market Price

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6
Q

What is the formula for Marginal Revenue?

A

change in TR / change in Q

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7
Q

What is Marginal Revenue?

A

the change in total revenue from selling 1+ unit

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8
Q

What is Marginal Cost?

A

the increase in TC resulting from producing another unit

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9
Q

A demand curve for a perfectly competitive market is …

A

Horizontal

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10
Q

The MR curve for a perfectly competitive market/firm is the same as the ….

A

Demand Curve

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11
Q

How do firms use MR and MC to maximise profit?

A

Firms need to compare MR from selling an extra unit to MC of producing an extra unit. The difference btw MR and MC is the additional profit (loss) from 1 more unit.

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12
Q

If MR > MC, what is the impact on profits?

A

Profits rise (meaning firm will expand operation)

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13
Q

Firms what to continue producing units of output until the point where … because …

A

MC = MR

Cos at this quantity the firm will make no extra profit

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14
Q

The profit maximising output/quantity is where …. (using TC and TR)

A

the difference between TC and TR is greatest

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15
Q

The profit maximising output/quantity is where …. (using MC and MR)

A

MC = MR

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16
Q

In a perfectly competitive market, P =

A

=MR

=MC

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17
Q

What is formula for profit (using P, Q, TC)?

A

= (P*Q)-TC

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18
Q

What is formula for profit (using P, Q, ATC)?

A

= (P-ATC)*Q

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19
Q

To maximise profit a firm produces level of output where….

A

MC=MR

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20
Q

What happens to profit when P > ATC?

A

Profit earnt

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21
Q

What happens to profit when P = ATC?

A

Breakeven

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22
Q

What happens to profit when P < ATC?

A

Loss

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23
Q

In long run what will happen to firms if they can’t cover their costs?

A

They will close

In a perfectly competitive market, firms continually enter/exit market

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24
Q

What is economic profit?

A

Revenue minus all costs - implicit and explicit

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25
Q

What is the formula for economic profit?

A

= TR - TC

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26
Q

What happens to the supply curve when new firms enter the market?

A

Supply curve shifts to the right

- the more firms in a market there further to the RIGHT the supply curve is.

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27
Q

What is the impact on the market price when more firms enter the market?

A

Market price decreases (cos supply curve shift right)

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28
Q

What is accounting profit?

A

Revenue minus all explicit costs

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29
Q

Is economic profit a better view of the health of a business (than accounting profit)? Why?

A

Yes

- cost it considers all costs, implicit and explicit

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30
Q

What is economic loss?

A

Where supplier’s TR < TC

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31
Q

Will firm continue to produce if price < AVC?

A

Yes, in the SHORT RUN even when suffering loss.

But in LONG RUN frims will exit industry if not able to cover all costs.

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32
Q

What happens when firms exit the market?

A
  • supply curve shifts left

- price rises

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33
Q

Do economic profits attract firms to a market?

A

Yes

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34
Q

What happens to price when firms enter the market?

A

Price is pushed down (until a typical firm breaks even)

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35
Q

What happens to price when firms exit the market?

A

Price is pushed up (until a typical firm breaks even)

36
Q

What does the entry / exit process result in?

A

Long-run competitive equilibrium

37
Q

What is the Long-run competitive equilibrium?

A

a situation where the entry/exit of firms results in typical firm breaks even

38
Q

What is the Long-run competitive equilibrium equal to on typical firms average cost curve?

A

the minimum point

39
Q

What is the effect of increased demand in long run?

A

Demand increases
Price increases
Therefore E/profit

Attracts new firms to market
Supply increases
Price decreases
No more e/profit

40
Q

What is the effect of decreased demand in long run?

A

Demand decreases
Price creases
Therefore E/losses

Firms exit the market
Supply decreases
Price increases
No more e/losses

41
Q

What is the long-run supply curve?

A

the curve showing relationship in the long run btw market price and quantity supplied

42
Q

In the long run a perfectly competitive market will supply …. at a price …. on typical firm’s average cost curve

A
  1. whatever amount of product that consumers demand

2. determined by the min. point

43
Q

The position of the long run supply curve is determined by…

A

the min. point on typical firm’s avg cost curve.

44
Q

What are constant cost industries?

A

An industry in which a typical firm’s avg cost curve doesn’t change as industry expands production

45
Q

What direction is the long-run cost curve of constant cost industries?

A

Horizontal

46
Q

What direction is the long-run cost curve of increasing cost industries?

A

Upwardly sloping

47
Q

What direction is the long-run cost curve of decreasing cost industries?

A

Downwardly sloping

48
Q

What are the characteristics of perfectly competitive markets?

A
  • no barriers to new firms entering the market
  • no barriers to existing firms exiting the market
  • many buyers and suppliers
  • all parties are small relative to the size of the market
  • all firms sell identical products
  • all firms are PRICE TAKERS
49
Q

What is the elasticity of perfectly competitive markets?

A

Perfectly Elastic

Demand Curve = Horizontal

50
Q

What is a Price Taker?

A

A buyer/seller who is unable to affect the market price

51
Q

What determines the market price in a perfectly competitive market?

A

the intersection btw supply curve and demand curve

52
Q

What is formula for profit?

A

TR - TC

53
Q

Using TR and TC, where is max profit?

A

Where the difference btw TR and TC is the greatest

54
Q

What is formula for max profit?

A

MC = MR

55
Q

Using TR and TC, where is max profit on a graph?

A

Where the vertical distance btw TR and TC curves is the largest

56
Q

Profit maximising output/quantity is where…

A

MC = MR

57
Q

What happens to profits if MC > MR?

A

Profits will decrease

58
Q

What is formula for avg revenue?

A

TR / Q

59
Q

What is avg revenue?

A

Revenue generated per unit

60
Q

What is formula for MR?

A

Change in TR / Change in Q

61
Q

What is MR?

A

Change in total revenue from the sale of 1 extra unit

62
Q

In a perfectly competitive market, price is equal to…

A

= AR

= MR

63
Q

Profit occurs when ____ > ATC

A

P

64
Q

Break even occurs when ___ = ATC

A

P

65
Q

Loss occurs when ____ > ATC

A

P

66
Q

Formula for total profit

A

(P-ATC) x Q

67
Q

Formular for profit per unit

A

P-ATC

68
Q

A firm maximises profit at a level of output where

A

MR = MC

69
Q

Why do firms break event when P = ATC?

A

Cost TC = TR

No e/profit

70
Q

What is economic profit?

A

a firms total revenu less all costs , implicit and explicit

71
Q

E/profit in a perfectly competitive market is….

A

only a short run occurrence

72
Q

Why is e/profit in a perfectly competitive market is only a short run occurrence?

A

Cos e/profit leads to the entry of new firms into the market

73
Q

What is the effect of entry of new firms on e/profit?

A
  • supply increases
  • supply curve shifts right
  • price falls
  • e/profit falls… suppliers break even
74
Q

What is e/loss?

A

a situation where TR < TC

75
Q

E/profit in a perfectly competitive market is….

A

only a short run occurrence

76
Q

Why is e/lossin a perfectly competitive market is only a short run occurrence?

A

Cos e/loss leads to the exit of existing firms into the market

77
Q

What is impact of fall in demand?

A
  • demand falls
  • demand curve shifts left
  • price falls
  • e/losses occur
78
Q

What is productive efficiency?

A

a product produced using the least amount of resources

79
Q

What is allocative efficiency?

A

when a production reflects consumer preferences

to some extent all products produced to point where MB = MC

80
Q

What does the price of goods represent to consumers?

A

MB

81
Q

In perfectly competitive markets, firms produce goods to a point where price =

A

MC

82
Q

Firms will produce goods to point where…

A

MB=MC

83
Q

What is Dynamic Efficiency?

A

when new tech/innovations are adopted over time

…firms adapt their product to changes in consumer taste

84
Q

When striving for d/efficiency, what do firms use?

A

New tech, which reduces production costs and increases productivity

85
Q

What do firms achieve by adapting products to consumer preferences?

A

Products goods that consumers most value

So, allocative efficiency

ECON1010 (5 decks)

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