Flashcards in Micro- Firm, Perfect Competition, Monopoly Deck (21)
What’s the cost function equation
C (q) = F + VC (q)
Fixed costs plus variable costs
(q) shows function of quantity
What are fixed costs
cost incurred regardless of amount produced
What is marginal cost
: cost of producing an additional unit of output
What is average cost
: measure of unit costs
AC(q) = AFC + AVC
Where do MC and AC meet
MC intersects AC at the minimum of AC
What’s an opportunity cost
The opportunity cost of a product is the value of the
best forgone alternative use of the resources employed in making it.
What’s normal profit
Normal profit of a product is its selling price minus opportunity cost.
When do economies of scale occur
AC’ (q) < 0 : increasing returns to scale (or economies of scale).
When do constant returns to scale occur
AC’ (q) = 0 : costant returns to scale.
How does a firm maximise profit
The firm maximises profit by producing the level of output at which marginal
revenue equals marginal cost.
What’s a price taker
The perfectly competitive
firm is a price taker: it cannot inuence the price
that is paid for its product.
arises due to consumers indifference between the products of competing firms
Total revenue - total costs
What are sunk costs
Variable costs incurred in the past that can’t be changed or avoided in the future (eg rent you can’t get out of).
Hence VC are not always avoidable and a fixed costs are not always unavoidable
What’s the condition for shut down in the short run
pq (tot revenue) < avoidable costs
Note in the short run: avoidable costs do not include sunk costs.
What’s the condition for shut down in the long run
p < AC(q)
And avoidable costs include sunk costs
How do you find industry short run supply curve
Sum the individual firms’ short run supply curves (note in short run the number of firms in the industry is fixed)
What happens to price in the long run in perfectly competitive market
Any short-run profits are soaked up by new firms in long-run => price is driven down to the minimum of the AC curve
Due to free exit and entry condition
What is Pareto efficiency/optimality
An allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off.
Define elasticity of demand
percentage change in quantity divided by a percentage change in price
Almost always negative
Equation for Lerner markup index L
L = (P - MC) / P
L = - 1/ εd