week 10 Flashcards
(14 cards)
what is economic profit?
accounts for both explicit financial costs and implicit opportunity costs.
how do we calculate the economic profit ?
Economic profit = total revenue – explicit costs – implicit costs
how do you calculate average revenue?
Average revenue = total revenue/quantity = price
how do you calculate the average cost?
cost per unit, calculated as your firms total costs (included fixed and variable costs) divided by the quantity produced
what is the difference between short run vs long run?
Short run – where at least one factor of production is fixed
Long run – where factors of production is not fixed
what is the rational rule for entry?
if you expect to earn a profit you will enter the market but if more competitors join the market the market becomes less profitable
what does free entry in market cause?
the market pushes economic profits down to zero. Free entry pushes the price down toward the average cost. Free exit pushes the price up toward average cost. In the long run, with free entry and exit price equals average cost
how do firms deter entry into markets ?
Create customer lock in – switching costs. Make it costly to switch products to reduce people switching firms an create loyalty with customers
Unique cost advantages – mass production can reduce costs and increase yields. The benefit of mass production can keep small firms from entering the market. Or other economies of scale
Government policies – patents give you the right to be the only producer, regulations created can also create barriers to entry
what is nash equilibrium
occurs when you both choose your best response
explain how Learning by doing can create a cost advantage for a business
While gaining experience producing a product, businesses learn more efficient production methods, allowing them to produce more with the same inputs.
explain how Mass production can create a cost advantage for a business
When the benefits of mass production are large, smaller entrants into the industry—which don’t produce on as large of a scale—will be less efficient, and hence not effective competitors.
explain how Research and development can create a cost advantage for a business
. Research and development can be used to develop new, cheaper ways to make existing products that can provide a lasting cost advantage over potential entrants.
suppose your business rivals are experiencing economic losses what would happen to your demand curve?
. Economic losses will cause firms to exit the market. This will increase your business’s demand (shifting it to the right) and increase its market power (making your business’s demand steeper)
game theory
read over power points
