Micro- Firm, Perfect Competition, Monopoly Flashcards Preview

3E1 Business Economics > Micro- Firm, Perfect Competition, Monopoly > Flashcards

Flashcards in Micro- Firm, Perfect Competition, Monopoly Deck (21)
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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 in‡uence the price
that is paid for its product.

arises due to consumers’ indifference between the products of competing firms


Profit equation

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


Difference between profit and producer surplus

Profit is TR - TC, where as producer surplus is TR - VC therefore the difference is the fixed costs of production