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What are explicit costs?
What are implicit costs?
Explicit Costs = Money payments for resources outside firm
Implicit costs = Opportunity costs of resources firm owns
What is a normal profit?
What is Economic profit?
What is a normal profit?
Implicit cost of entrepreneurship. (compared to what was being made before)
What is Economic profit?
Total revenue - Implicit & Explicit Costs (including normal profit)
What is Economic profit?
Total revenue - Implicit & Explicit Costs (including normal profit)
Short run vs long run
Short run = fixed plant capacity but a short period long enough to vary its output by applying smaller or larger amounts of labor or resources.
- Long run = a period of time long enough to adjust the quantities of all the resources it employs.
- Ex: add a new production facility and installs more equipment.
Law of diminishing return
At some point output will decrease as more labor keeps being added.
In the short run the TC of any level of output is the sum of total fixed and variable costs.
What is the equation?
TC = TFC + TVC
AFC, AVC, and ATC are.....
are fixed variable and total costs per unit of output.
MC is the extra cost of producing 1 mre unit of output.
Most firms have U shaped long run average total cost curves, reflecting economies, and then dis-economies of scale.
What are the consequences of greater specialization of labor and management, more efficient capital equipment, and the spreading of start-up costs over m
MES stands for?
Minimum efficient scale is the lowest level of output at which a firms long-term average total cost is at a minimum.
Income statement for a business will show 3 things....
Will show revenues less expenses
- whether or not the firm had a net profit
- or net loss.
Mortgage contract & Installment payment contract for a piece of equipment are examples of fixed costs.
can also be considered ______ ________/
TR - Explicit - Implicit = __________________
Economic Profit or Loss
is the extra output that comes from producing 1 more unit
Is MC = MR the same thing as Net Profit?
Is economic profit the same as Accounting profit?
TFC + TVC = ?
TFC + TVC = TC
How do I figure out my Average Fixed Cost? (AFC)?
How is marginal cost calculated?
Change in Total cost/ Change in Quantity
If critical resource dropped in price...........then the ATC curve would also shift ________.
Economies of scale:
Constant Return to Scale:
Diseconomies of Scale:
- Economies of scale: Efficient low costs (^5% labor = ^10% output)Constant Return to Scale: ^production v costs(^5% labor = ^5% output)
- Diseconomies of Scale: Uncontrolable reasons / Unefficient
- (^5% labor = ^-20% output)
All of the major market structures –
competition, monopoly, oligopoly (including cartels) and monopolistic
competition all follow the profit maximization rule of ......
MR = MC
Marginal revenue is the change in..........
change in total revenue / Change in quantity
In economic theory, the breakeven point can also be determined by finding where ______________________________-
Total Revenue = Total Cost.
AVC line is higher than the
market price, then the firm should shut down.
additional tax on each unit of production will raise the marginal cost curve and it will shift upward
If the market price is at the point where MC intersects with ATC, this is also known as the Break-Even point.
Monopolies usually offer society the highest prices at a lower output versus the free market.
If the government set the monopoly price where Price =
Marginal Cost, then most likely the monopoly would need a public subsidy
. Cartels are part of the
It is possible for a firm to enjoy an accounting
profit yet at the same time not enjoy an economic profit.
. The ______ ______ is used to
measure the market share of the four top firms within an Oligopoly.
______ ________ is used to anticipate the various decisions that firms within an Oligopoly could make and it also tells us about the various potential market outcomes.
- This occurs when firms agree with each other to fix prices and the quantity
- produced. Collusion is illegal in the U.S. because this activity restricts and
- hampers free market competition
- this term is associated with a monopoly. If a monopoly (i.e. PG&E) charges
- “significantly” different prices to each customer within the same market based
- upon their knowledge of elastic and inelastic demand, then the U.S. Anti-Trust
- Department could charge the monopoly with price discrimination.
Barriers to entry
- may do certain things to prevent new competitors from entering the marketplace.
- If they can successfully set up barriers to entry, then they can stop new
- competition. For example, they could bribe officials at City Hall to make the
- registration process for a new firm so expensive and bureaucratic that the new
- firm would just give up trying to enter the market.
Increasing cost industry is AKA
- This means the same as “diseconomies of scale.” As production expands, the long run
- average total costs go up.
5. Explicit Cost:
are generally costs that can be verified with receipts. CPAs and accountants
track these costs.
6. Variable Costs:
costs change as production changes. For example, if a firms switched from an 8
hour day to 24/7, then you would expect their electric bill to rise.
What should be used to try and anticipate a competitors next move in an oligopoly?
Game theory software
If a business cannot cover AFC & AVC then it should shut down.
If we draw a Marginal Cost curve, then we
can also draw the ______ _____. These two curves will match each other
after the point where the ______ and _____ curve intersect.
- Supply curve
- AVC & MC curve intersect
AFC = TFC / Quantity
AVC = TVC / Quantity.
These calculations are correct.
The Marginal Cost curve at first _____ then _____ as production picks up speed
If you can’t calculate MC=MR for whatever
reason, then the next best thing to do would be to calculate ......?
Total Revenue – Total Cost.
Where MC intersects with ATC......
it is known as minimum point or breakeven point.
If you are looking at a firm in a very competitive market
and if you notice that no matter how much they sell, their Marginal Revenue stays
at a flat amount (e.g. $4), then this must mean that they have a totally
elastic demand curve.
monopolistic competition and cartel market structures are the same as the monopoly
Only the ______ market structure is different graph, with its kinked demand curve
Technically speaking, the supply curve starts at
the point where the marginal cost curve is just above the.............
AVC cost curve
If a monopoly is practicing price
discrimination, then they are probably taking advantage of inelastic versus
elastic demand curves for different customers.
Welfare loss to society means that it is missing out
on higher output and lower prices because a monopoly exists rather than a free and
set the monopoly price where Price
= Marginal Cost, then most likely the monopoly .................
would need a public subsidy to survive.
we have studied __ market structures.
We have studied five main market structures – competition, oligopoly, cartel,monopolistic competition and monopoly.
- firm controls anywhere from 90 to 100 percent of the industry. The competition
- that does exist must be small and not be a serious threat to the monopoly firm.
- On the horizon, the monopoly must be careful because they may face a challenge
- from the U.S. Anti-Trust Department that will seek to either regulate them or
- break them up.
- This market
- structure represents that vast majority of U.S. business. Essentially, the firm
- that has the most inelastic demand curve will be the winner in terms of total
- revenues, gross sales, profits and market share. But because there may be
- robust competition their market advantage may disappear. The beneficiary of
- this type of competition is the consumer who will enjoy more choice, better
- quality, lower prices and perhaps an investment opportunity in the successful
- firm’s stock.
- This industry structure has a few firms (3 to 15) that dominate the industry while
- the other competitors often compete for the leftover sales, profits, market
- share and consumers. The graph that represents this industry is a kinked demand
- This market
- structure occurs when the suppliers come together and work with each other to
- restrict supply in order to keep prices high. This activity is illegal in the
- U.S. A good example in today’s world of an international cartel would be OPEC –
- the Organization of Petroleum Exporting Countries.
- firms in the industry have perfectly elastic demand curves. There are many
- firms in the industry and they are free to enter or exit at will. Finally, the
- “economic profit” margin is zero and even the accounting profits must be razor
If AVC are not met then business should shut down.
Is the Fixed Cost curve is always higher than the Variable Cost curve in most business.
What characteristics does the “perfectly competitive
Many competitors, similar products and no one firm has market price control.
Many competitors, similar products and free market entry and exit for firms
Which industry closely represents the
perfectly competitive market?
The online travel industry – Yahoo Travel, Expedia, Priceline.com.
If the demand curve for an individual firm is perfectly elastic, then we can say:
- The firm has no market pricing power.
- It is in a state of perfect competition.
It can produce as little or as much as it wants and it sells products at the same price.
Is Pure Competition is commonplace in the real world?
it is mainly a theoretical concept but there are some firms on the internet that come close to it.
How is Marginal Revenue calculated?
Change in TR/Change in Quantity
What is this saying?
Marginal Revenue = Average
Revenue = Price
Then you have Perfect Competition
The demand curve must be totally elastic
How do you calculate average revenue
Economic Profit is calculated how?
- Total revenue minus
- explicit and implicit costs.
If we drew a graph that plotted both the Total Revenue and
Total Cost curves, then we
- You reach a breakeven point that includes a ‘normal profit’ when they intersect
- with each other
Point where firm maximizes its profits.
Let’s assume that a firm is going through hard economic
times. The market price
generates enough revenues to cover the average variable
costs, but not all of the total costs.
Therefore, what should the firm do next?
Continue to produce as long as we can still cover average variable costs.
- but also think of ways to
- minimize costs and increase revenues.
Let’s assume that a firm is going through very hard
economic times. Unfortunately, the
market price doesn’t even generate enough revenue to cover
the average variable costs.
Therefore, what should this firm do?
Stop all production and shut down immediately
- Consider selling the business and get out of
- the industry
At the point where Marginal Cost just intersects the
Average Total Cost, and assuming the
price of the product or service is also at this level, then
Your are breaking even with no economic
When Economic Profit = 0,
then this means what
The firms in the industry are earning normal profits.
- There is no motivation to leave the industry
- or for new firms to enter the industry.
The federal government has just given everyone a temporary
income tax cut and quickly
mailed out the rebate checks. If the demand curve for an a
product temporarily increases and
sales spike upward in an industry that had zero economic profits
for several years, then we
- That the temporary spike in sales won't do much good in the
- long-run because as more firms enter the industry to seize the new profits,
- then this will eventually bring the economic profits for the industry back to
- In the short-run times will be good, but in
- the long-run everyone will return to zero economic profits.
Most firms belong to increasing
cost industries. This means that:
The long-run supply curve is upward sloping.
- As the industry expands, more firms will enter
- the industry and will compete for the inputs that are necessary for production.
- New firms entering the industry will bid up
- input resource prices (e.g. labor) and will therefore increase the per-unit
At the lowest point of the
Long-Run Total Cost Curve, what we can say?
Management has made the best choices and has minimized long-run ATC.
- That Productive Efficiency has been
- reached when the firm can produce in the least costly way and that they are
- using the least amount of inputs.
- That Allocative Efficiency is reached
- when the firms use the best combination of inputs so that they can produce the
- best mix of products and services desired most by society.
When a generic drug becomes available, then price of the drug will fall. Therefore, consumer surplus will rise and what will society experience?
Fixed Costs are expenses that:
Do not change as production changes.
- Are contractual obligations such as a fixed
- rate commercial mortgage loan.
Total Fixed Costs + Total
Variable Costs = What?
What does the term “short-run
You only have time to alter one variable of input regarding land, labor or capital.
If you started your own business and had $100,000 in
revenues and $50,000 in expenses
(that were verified with receipts), then how would you
classify these costs?
As you were working in your new business trying to make a
profit, you passed up an offer
for a job that would have paid you $75,000 per year in
salary. This is a good example of:
Implicit cost & Opportunity cost
The law of diminishing returns
would agree with what statement:
- will get more output as you hire more workers but if you hire too many workers,
- then each new hire will contribute proportionally less versus the workers that
- were first hired by you
The Marginal Cost is calculated
- Dividing the change in total cost by the change in the quantity
It is the added cost of producing one more unit of the product or service.
Both the Average Fixed Cost and Average Variable Cost can
be determined by dividing
Total Fixed Cost and Total Variable Cost by the units of
Perfect competition: 1000 of providers of same good, firms are price takers, horizontal demand curves, and earn zero economic profits due to
Pure Monopoly: Single seller selling unique product, can earn economic profits due its price making power, 100% entry barrier.
Oligopoly: Only a few firms offer similar or identical product. Have price setting power & enter barriers are high thus forming cartels (acting in unison)
Monopolistic Competition: Large # of sellers but sell products that are not exactly the same. Entry barriers exist but are low and can determine pricing up to certain extent. Economic profits cannot be earned in the long run due to competitors & low barrier costs. ( Mex Rest) ATC = MC
If Price = ATC then is there a economic profit?
Accounting Profits Vs Economic Profits vs Normal Profit
A firm is making an economic profit if EP is greater than..... TR -
Accounting Profit does not put into account Opportunity costs and is TR -
- Normal profits is where TR = TC
- not making a profit according to accountants BUT economist include salary into normal profit of what he/she would of earned working for someone else.
What are forms of imperfect competition?
- Monopolistic Competition
In Perfect Competition...
AR > ATC = Econ Profit
AR < ATC = Econ Loss
MC = MR ----- to max profits in short run
Average revenue aka price
ENTRY ELIMINATES PROFITS
EXIT ELIMINATES LOSSES
Output will always return to MR = MC in the long run due to people being attracted to economic profits and low entry barriers and competition.
Increasing cost industry
Constant Cost Industry
Decreasing cost industry
- Economies of scale
- Constant return to scale
- diseconomies of scale
What does no close substitutes mean?
That means there are no close subtitutes for that product.
What are two legal barriers to entry?
Patents & Licenses
Patent length lasts ____ years in all of worlds nations.
Why does a monopoly survive?
Due to entry barriers such as economies of scale, patents & Licenses, the ownership of essential resources, and strategic actions to exclude rivals.
A monopoly has a _________ shifting demand curve
Downward which means it is a price maker.
Does a monopoly have a supply curve?
What is the socially optimal price? that achieves ______ _____ and still may result in losses?
What is the fair-return price which yields a normal profit but fails to achieve allocation efficiency?
- Socially optimal Price = P = MC
- Fair-return Price = P = ATC
What are the 3 conditions necessary for price discrimination?
- 1. Monopoly power
- 2. Able to separate buyers based on demand elasticities
- 3. Inabilitie of buyers to resell the product
WHAT IS EXCESS CAPACITY?
plant equipment that are underused because firms are producing less than the minimal ATC output.
Firms profits depend on not only their own price but that of other competitors.
competition of two produts used with two different industries
Where one firm may adjust their price ( the leader in the industry) and then the others follow. This way it isnt blatantly collusion.