unit 7

Question 1

economies of scope

Answer 1

cost savings that occur when two or more products are produced by the same firm

Question 2

differentiated product

Answer 2

product produced by a single firm that has some unique characteristics compared to similar products of other firms

Question 3

WTP

Answer 3

an indicator of how much a person values a good - max amount they would pay to acquire a unit of the good

Question 4

economic profit

Answer 4

firm’s total revenue minus its total costs including the opportunity cost of capital. it is the additional profit above the minimum return required by shareholders.

Question 5

normal profit

Answer 5

zero economic profit: the rate of profit is equal to the opportunity cost of capital

Question 6

profit margin

Answer 6

difference between the price and marginal cost - show on diagram

Question 7

demand curve

Answer 7

the curve that gives the quantity consumers will buy at each possible price

Question 8

isoprofit curve

Answer 8

join points that give the same level of total profit

Question 9

economies of scale

Answer 9

where an increase in inputs to a production process increases output more than proportionally and so the technology exhibits increasing returns to scale

Question 10

constant return to scale

Answer 10

double input gives double output

Question 11

DEOS

Answer 11

where an increase in inputs to a production process increases output less than proportionally and so the technology exhibits decreasing returns to scale

Question 12

R&D

Answer 12

expenditures by a private or public entity to create new methods of production, products or other economically relevant knowledge

Question 13

Network EOS

Answer 13

are demand-side benefits of scale where people are more likely to buy a good or service if it already has a lot of users

Question 14

opportunity cost of capital

Answer 14

the amount of income an investor could have received by investing the unit of capital elsewhere

Question 15

fixed costs

Answer 15

costs of production that do not vary with output

Question 16

marginal cost

Answer 16

the effect on TC of producing one additional unit of output: slope of TC at each point

Question 17

constrained choice problem

Answer 17

how we can do the best for ourselves given our preferences and constraints, and when the things we value are scarce

Question 18

marginal revenue

Answer 18

the increase in revenue obtained by increasing the quantity by an additional unit= change in revenue/change in Q

Question 19

gains from trade/exchange

Answer 19

the benefits that each party gains from a transaction compared to how they would have fared without the exchange

Question 20

consumer surplus

Answer 20

Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

Question 21

producer surplus

Answer 21

Producer surplus is a measure of the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. The difference, or surplus amount, is the benefit the producer receives for selling the good in the market.

Question 22

PED

Answer 22

how responsive consumers are to a price change = % change in q/ % change in p

Question 23

mark up

Answer 23

profit margin as a proportion of the price = p-mc/p

Question 24

market failure

Answer 24

occurs when markets allocate resources in a Pareto-inefficient way e.g. when firm sets p>mc so market outcome is not pareto-efficient

Question 25

deadweight loss

Answer 25

loss of total surplus relative to a pareto-efficient allocation. it gives a measure of the consequences of market failure: the size of the unexploited gains from trade

Question 26

monopoly rents

Answer 26

form of economic profits which arise due to restricted competition in selling a firm’s product

Question 27

substitutes

Answer 27

2 goods for which an increase in p of one leads to an increase in q demanded of the other

Question 28

when is PED elastic

Answer 28

when lots of substitutes for a product- as if p increases consumers can easily switch to another similar product that is cheaper only doesn’t happen when consumers have high brand loyalty

Question 29

cartel

Answer 29

group of firms that collude in order to increase their joint profits.

Question 30

competition policy

Answer 30

Government policy and laws to limit monopoly power and prevent cartels.

Question 31

natural monopoly

Answer 31

If a single firm can supply the whole market at lower average cost than two firms/ A production process in which the LRAC curve is downward-sloping to make it impossible to sustain competition among firms in this market

Question 32

slope of isoprofit curve =

Answer 32

-profit margin/ quantity = P-MC/Q

Question 33

profit=

Answer 33

revenue - costs = pxq - unit cost x q

Question 34

draw isoprofit curves

Answer 34

p and quantity on axis - like indifference curves

Question 35

p=unit cost

Answer 35

isoprofit curve where there is 0 profit as selling each unit of a good for exactly what it cost

Question 36

why is firm growth limited

Answer 36

because sometime cheaper to buy part of the product than to manufacture it themselves so outsourcing limits firms size

Question 37

why is the amount given to shareholders a cost for firms

Answer 37

because it is needed to cover the opportunity cost of capital so that investors will continue to invest in the assets that the firms needs to produce its output

Question 38

what happens to average costs when quantity increases

Answer 38

AC decrease as fixed costs are shared between more goods

Question 39

why might AC increase

Answer 39

if a firm increases the number of shifts per day so may have to pay overtime rates and equipment breaks down when production line is working for longer

Question 40

zero-economic profit curve=

Answer 40

AC curve- make normal profit - p=AC at each quantity

Question 41

when does AC slope up

Answer 41

when AC

Question 42

when is marginal revenue high

Answer 42

when p is high and q low

Question 43

when does a firm maximise profits

Answer 43

when mc=mr draw the curves - profit reaches maximum

Question 44

when MR>MC

Answer 44

Mprofit is positive so profit increases with q

Question 45

when MR < MC

Answer 45

Marginal profit is negative so profit falls with quantity

Question 46

draw diagram of price -setting firm

Answer 46

y-axis is price and MC, x axis is quantity
pareto-efiicient outcome when MC=D point f
firms sells at priceP* andq* - where isoprofit curve is tangent to demand curve so dead weight loss

Question 47

what is the division of gains determined by

Answer 47

bargaining power if firms have more they can set price higher and restrict q

Question 48

what is point f the pareto-efficient outcome

Answer 48

becuase no allocation is a pareto-improvement. producing another car would cost firm more than any of the remaining consumers would pay

Question 49

demand is elastic when value is

Answer 49

greater than 1

Question 50

inelastic demand when value is

Answer 50

less than 1

Question 51

when is elasticity high on the demand curve

Answer 51

when p is high and q low because percentage change in quantity is large compared to a small percentage change in price

Question 52

how can a firm increase its profits

Answer 52

by diversifying its product range or through advertising so demand high and elasticity low

Question 53

when do firms set p>mc

Answer 53

when their goods are differentiated so face limited competition
and when AC a decreasing which could be due to EOS.