PA - Economic Decisions Making by Firms and Consumers Flashcards
(19 cards)
Total Cost (TC)
Total cost equals fixed costs plus variable costs (TC = FC + VC). Example: A company with $5,000 fixed costs and $3,000 variable costs has a total cost of $8,000.
Marginal Cost (MC)
The increase in cost from producing one additional unit of output. Example: Producing one more computer increases costs by $600.
When to Increase Production
Firms should increase production when marginal revenue exceeds marginal cost. Example: If marginal revenue is $1,000 and marginal cost is $600, production should be increased.
Barriers to Entry Causing Monopoly
Common barriers include one firm owning a key resource and economies of scale. Example: A utility company has exclusive access to water sources and benefits from scale.
Monopoly Characteristics
One seller offers a unique product with no substitutes and there are barriers to entry. Example: A local water company is the sole provider in its region.
Monopoly vs. Competitive Firm
A monopoly’s marginal revenue is less than price, unlike a competitive firm. Example: A monopolist reduces price to sell more, lowering marginal revenue below price.
Monopolistic Competition Characteristics
Many sellers, product differentiation, and free entry/exit. Example: Coffee shops in a city offer unique flavors and branding but compete in the same market.
Oligopoly Behavior Under Self-Interest
Firms often raise production regardless of competitors’ actions. Example: A company increases output whether rivals do or not, undermining a profit-sharing agreement.
Oligopoly Key Feature
It represents a prisoner’s dilemma where firms benefit from cooperation but often act in self-interest. Example: Competing airlines lower prices despite an agreement to keep them high.
Indifference Curve Properties
Higher curves are preferred, and curves do not cross. Example: A consumer would choose a bundle on a higher curve for greater satisfaction, and no curve intersects another.
What are 3 characteristics of Perfect Competition (with examples)?
- Homogeneous Products (e.g., wheat, corn)
- Many Sellers (e.g., individual farmers)
- Free Entry/Exit (easy to start or leave farming)
What are 3 characteristics of Monopolistic Competition (with examples)?
- Differentiated Products (e.g., different brands of shampoo)
- Many Sellers (e.g., lots of haircare brands)
- Free Entry/Exit (new brands enter the market often)
What are 3 characteristics of an Oligopoly (with examples)?
- Few Sellers (e.g., airline industry)
- Interdependence (Delta may react to United’s pricing)
- Potential for Collusion (e.g., alleged price-fixing in telecoms)
What are 3 characteristics of a Monopoly (with examples)?
- One Seller (e.g., local water utility)
- Unique Product (only water provider in region)
- High Barriers to Entry (infrastructure, regulation)
What does a downward-sloping indifference curve represent?
It shows that if you consume less of one good, you must consume more of the other to maintain the same level of satisfaction. Example: If you eat fewer slices of pizza, you’d need more burgers to be just as happy.
Why are indifference curves bowed inward (convex to the origin)?
Because of diminishing marginal rate of substitution (MRS)—as you consume more of one good, you’re willing to give up less of the other. Example: The more coffee you have, the less extra tea you’re willing to trade for another cup of coffee.
Can indifference curves cross? Why or why not?
No, they cannot cross—each curve represents a different level of utility, and crossing would imply inconsistent preferences. Example: If combo A is equally satisfying as combo B, and combo B is as satisfying as combo C, then A and C must be equally satisfying too. Crossing curves would break that logic.
What does a higher indifference curve represent?
A higher curve means a higher level of satisfaction or utility. Example: A bundle with 3 tacos and 2 sodas is preferred over 1 taco and 2 sodas—if it’s on a higher curve.
What does the slope of an indifference curve represent?
The slope is the marginal rate of substitution (MRS)—how much of one good you’re willing to give up to get more of the other. Example: If the slope is -2, you’d give up 2 sodas to get 1 more taco and stay equally happy.
