Midterm 2 Flashcards
(28 cards)
What are explicit costs?
Costs that a firm pays, usually cannot be used again, like flour for a pizza shop.
What are implicit costs?
These are opportunity costs, things that cannot be tracked on a spreadsheet, but income was loss, like a business owner going away for the weekend and they closed shop.
Equation for profit.
Profit = Total Revenue - Total Cost
Economic profit equation
Economic profit = Total Revenue - Total Cost (including implicit and explicit costs)
Average Total Cost equation.
ATC = Total Cost/Quantity
ATC = TC/Q
Marginal Cost equation
Marginal Cost = Change in total cost / Change in quantity
MC = △TC / △Q
Average Fixed Cost equation.
AFC = Fixed Cost / quantity of output
Average Variable Cost equation.
AVC = variable cost / quantity of output
State the relationship between the Marginal Cost and Average Total Cost
Whenever marginal cost is less than average total cost, average total cost is falling.
Whenever marginal cost is greater than total cost, average total cost is rising.
Equation for Total Cost.
TC = Fixed Cost + Variable Cost
What are the two characteristics in a competitive market?
- There are many buyers and many sellers within the market
- The goods offered by the various sellers are largely the same.
What is the one characteristic that makes a market “perfectly competitive”?
Firms can freely enter or exit the market
Total Revenue equation
TR = Price x Quantity
Average Revenue equation
AR = TR / Q
Marginal Revenue equation
MR = Change in TR / Change in Quantity
Change in profit equation
MR - MC
What are the three characteristics for Qmax?
- If marginal revenue is greater than marginal cost, the firm should increase its output
- If marginal cost is greater than marginal revenue, the firm should decrease its output.
- At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal
What are the three times that a firm should shut down?
- TR < VC
- TR/Q < VC/Q
- P < AVC
Sunk cost definition
Cost that has been committed and cannot be brought back
Three rules to EXIT the market
- TR < TC
- TR / Q < TC / Q
- P < ATC
When should a firm ENTER?
- When P > ATC
What is another way you can write Profit?
Profit = (P - ATC) x Q
What is the key characteristic for a natural monopoly?
A single firm can supply a good or service to an entire market at a lower cost than could two or more firms.
What are the three conditions necessary for a monopoly to do price discrimination?
- Firm must have market power
- Firm must be able to recognize differences in demand
- Firm must have the ability to prevent resale
