Midterm 3 Flashcards
Profit
Difference between total revenue and total cost.
Revenue
Price multiplied by quantity. Revenue = P*q
Price Takers
when firms (or buyers) take the market price as given and make their selling (or buying)
decisions accordingly
When are firms most likely to be Price Taking Firms?
1) There are too many sellers
2) There is product homogeneity
3) There is free entry and exit
Marginal Revenue
The change in revenue resulting from a one-unit increase in output
Producer Surplus V2
The difference between total revenue and variable cost because PS ignores all fixed costs
Total Variable Cost
Total cost minus the fixed cost
Zero Profit
Profit is zero when price is equal to average total cost
Breakeven Price
The price at which the firm’s profit is equal to zero
Short Run Shutdown Price
The price at which the firm produces zero units in the short run
Free Entry
No barriers to entry
Barriers to Entry
Legal restrictions that prevent a firm from opening or increase the cost of opening
Normal Profit
There is zero economic profit because accounting profit in every industry is the same
Excess Profit
A situation in which the economic profit is positve
Constant-Cost Industry
If new firms can enter the market, and all new firms have the same cost functions as old firms, then the Long Run Supply Curve is perfectly elastic
Increasing-Cost Industry
If new firms can enter the market, and that drives up input prices then average total costs will increase, and the long run supply will be upward-sloping
Decreasing-Cost Industry
If new firms enter the market that leads to some economy of scale in the production of inputs which lowers average total costs and leads to a downward-sloping long run supply
Consumer Surplus
Amount a consumer would have been willing to spend minus the amount they had to spend. Area under the Demand Curve but above the price line.
Producer Surplus
The difference between the price and the minimum amount the producer would have sold it for. The area under the price line but above the Supply Curve.
Gains from Trade
Gains to society from producing a good with a value that was greater than its cost to produce. Sum of consumer and producer surplus.
Efficiency
a property of a resource allocation where gains from trade are maximized
Deadweight Loss
1) Inefficiency
2) Uncaptured gains from trade which present a missed profit opportunity
Price Ceiling
The max price any seller can legally charge
Shortage
A situation where quantity demanded is greater than quantity supplied; due to price being below the market clearing price
