Chapter 7.1 and 7.2

Question 1

Market Power and Market Failure

What is a firm?

Answer 1

A firm is an organization that employs factors of production to produce and sell a good or a service.

Question 2

Market Power and Market Failure

What is an industry?

Answer 2

A group of one or more firms producing identical or similar goods or services

Question 3

Market Power and Market Failure

What is market power?

Answer 3

Extent to which each individual firm in the industry is able to control the price at which it sells its product

Question 4

Market Power and Market Failure

How does market power relate to market failure?

Answer 4

The greater the market power, the greater the allocative inefficiency.

Question 5

Types of Market Structures

What are the different types of market structures?

Answer 5

-Perefect competition
-Monopoly
-Monopolistic competition
-Oligopoly

Question 6

Characteristics of Market Structures

What are the market structures characterized by?

Answer 6

-Number of firms in industry
-Product differentiation
-Barriers of entry

Question 7

Revenue

What is revenue?

Answer 7

Revenues are the payments firms receive when they sell the goods and services they produce over a given time period

Question 8

Revenue

What is the firm’s total revenue (TR)?

Answer 8

The firm’s total revenue (TR) is obtained by multiplying the price at which a good is sold (p) by the number of units of the good sold (q): TR = P × Q

Question 9

Revenue

What is the firm’s average revenue (AR)?

Answer 9

The firm’s average revenue (AR) is revenue per unit of output sold: AR = TR/Q = P x Q/Q = P

Question 10

Revenue

What is the firm’s marginal revenue (MR)?

Answer 10

The firm’s marginal revenue (MR) is the additional revenue arising from the sale of an additional unit of output: MR = Δ TR/Δ Q

Question 11

Revenue When Firms Have Some Control Over Price

What does the firm gain from having control over the price?

Answer 11

The price at which good is sold changes

Question 12

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is elastic?

Answer 12

Lower price

Question 13

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is inelastic?

Answer 13

Raise the price

Question 14

Revenue When Price Falls as Output Increases

What should a firm do to increase revenue if good is unitary elastic?

Answer 14

The price is unchanged

Question 15

The Short Run and The Long Run

What is the short run?

Answer 15

The period of time in which at least one factor of production is fixed and cannot be changed by the firm

Question 16

The Short Run and The Long Run

What is the long run?

Answer 16

The period of time in which all factors of production are variable

Question 17

Economic Cost

What are the kinds of economic costs dependent on?

Answer 17

Who owns the resources used by the firm. Resources are either owned by the firm itself, or are owned by outsiders to the firm from whom the firm buys them.

Question 18

Economic Cost

What are explicit costs?

Answer 18

Payments made by a firm to outsiders to acquire resources for use in production

Question 19

Economic Costs

What are implicit costs?

Answer 19

The sacrificed income arising from the use of self-owned resources by a firm

Question 20

Economic Costs

What is the sum of inmplicit and explicit costs know as?

Answer 20

Total economic costs

Question 21

Short-Run Costs

What are the short run costs?

Answer 21

Average and Marginal costs

Question 22

Short-Run Costs

What are average costs?

Answer 22

Costs per unit of output AC = TC / Q

Question 23

Short-Run Costs

What are marginal costs?

Answer 23

Is the increase in total cost of producing an extra unit of output. MC = ΔTC / ΔQ

Question 24

Long Run Costs

What is the cost affected by in the long run?

Answer 24

All of the factors of production are increased in order to increase output.

Question 25

# **Long Run Costs** What is the shape of the long run average cost curve (LRAC)?

Answer 25

‘Envelope’ curve, i.e. it envelops an infinite number of short-run average cost (SRAC) curves

Question 26

# **Long Run Costs** What is the long run average total cost curve? (LRATC)

Answer 26

Curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm’s inputs are variable.

Question 27

# **Long Run Costs** Why do the SRAC curves keep moving right?

Answer 27

There is more output produced

Question 28

# **Long Run Costs** Why is the LRAC a U shaped curve?

Answer 28

Due to economies and diseconomies of scale

Question 29

# **Economies of Scale** What are economies of scale?

Answer 29

Decreases in the average costs of production over the long run as a firm increases all of its inputs

Question 30

# **Economies of Scale** How do economies of scale explain downward sloping curve of LRAC?

Answer 30

As output increases, and a firm increases all inputs, average cost, or cost per unit of output, falls.

Question 31

# **Economies of Scale** What are examples of economies of scale?

Answer 31

-Specialization of labor -Specialization of management -Bulk buying -Financing economies

Question 32

# **Diseconomies of Scale** What are diseconomies of scale?

Answer 32

Increases in long-run average costs that come about when a firm increases its factors of production in order to increase its scale of output

Question 33

# **Diseconomies of Scale** How do diseconomies of scale explain upward sloping curve of LRAC?

Answer 33

As a firm increases its scale of production, costs per unit of output increase

Question 34

# **Diseconomies of Scale** What are examples of diseconomies of scale?

Answer 34

-Coordination and monitoring difficulties -Communication difficulties -Poor work motivation

Question 35

# **Profits** What is the equation for economic profit?

Answer 35

Economic profit = total revenue – economic costs = total revenue – the sum of explicit costs + implicit costs

Question 36

# **Profits** What is normal profit?

Answer 36

Occurs when economic profit is equal to zero, and TR = TC.

Question 37

# **Profits** What is abnormal profit?

Answer 37

Occurs when TR > TC.

Question 38

# **Profits** What are losses?

Answer 38

Occurs when TR < TC.

Question 39

# **Profit-Maximization** What is profit maximization?

Answer 39

Determining the level of output that the firm should produce to make profit as large as possible.

Question 40

# **Profit-Maximization** Where is profit maximization occured?

Answer 40

When MC=MR

Question 41

# **Profit-Maximization** What happens when the AC curve is below, on, and over the AR?

Answer 41

Below=profit On=normal Over=loss