7 - The firm and its customers Flashcards
(20 cards)
What is the equation for profit?
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Total Revenue - Total Costs
Profit = (P - U)Q
P = price, U = Unit Cost, Q = Quantity
Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?
- Each isoprofit curve depicts the firm’s profit for different outputs for a given price of the output good.
- Isoprofit curves can be upward-sloping when at high profit levels.
- Every price-quantity combination lies on an isoprofit curve.
- Isoprofit curves slope downward when the price is above the unit cost
3 and 4.
3 is true everywhere.
If P > U, then if Q increases, P must be lowered to keep profit constant therefore, IPC slope down.
Draw an isoprofit curve and feasible set.
What is the slope of the isoprofit curve?
MRS.
What are the main reasons that allow firms to grow so large?
- Technological advantage
- Cost advantage
- Demand advantages (remain large)
How does technological advantage allow firms to grow so large?
Large-scale production often uses fewer inputs per unit output.
How do cost advantages allow firms to grow so large?
Fixed costs have less impact on cost per unit when production is greater.
They may be able to purchase units at lower cost per unit because of bulk purchasing or increased bargaining power.
Equation for economies/diseconomies of scale?
If dAC/dQ < 0, economies of scale.
If dAC/dQ < 0, diseconomies of scale.
If dAC/dQ = 0, constant returns to scale.
How do demand advantages allow firms to remain large?
Network economies of scale.
People are more likely to buy a product if a lot of people are already using it.
Outsourcing keeps a firm small enough to avoid diseconomies of scale.
What is the marginal cost of producing one more unit?
ΔC/ΔQ
Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. (This means there are no fixed costs, that is, costs that are present for any level of output, including zero.) Which of the following statements is correct?
- The total cost curve is a horizontal straight line.
- The average cost curve is downward-sloping.
- The marginal cost curve is upward-sloping.
- The average cost and the marginal cost curves coincide.
4
Draw 3 iso-profit curves (zero profit, 70k profit, 150k profit), draw the MC curve.
If the firm were on IPC £70k, what profit would they make?
£3,043 per car.
£70,000 total.
What is the slope of the isoprofit curve?
MRS.
-(P-MC)/Q
P = price, MC = marginal cost, Q = quantity
The diagram depicts the marginal cost curve (MC), the average cost curve (AC), and the isoprofit curves of a firm. What can we deduce from the information in the diagram?
The profit level at A is 500.
The profit level at B is 150.
The price at C is 50.
The price at B is 36.
C.
The profit level for the isoprofit curve going through C can be calculated at Q = 10, where AC = 20, and P = 70. So the profit is (70 − 20) × 10 = 500. At C, Q = 20, so profit per unit is (P − AC) = 25. Since AC is 25, P must be 50.
Draw a diagram showing producer and consumer surplus with isoprofit curves and demand curves.
If there is DWL, is there Pareto efficiency?
No.
There are still more potential gains from trade to be made.
To be Pareto efficient, set price where MC = D.
What is the price elasticity of demand?
𝜀 = -(%changeD)/(%changeP)
What is the relationship between firm markup and elasticity of demand?
Firm markup is inversely proportional to the elasticity of demand.
