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Micro Midterm 2
| Question | Answer |
|---|---|
| what is utility | maximizes consumer happiness |
| Marginal utility equation | MU = (TU2 - TU1)/(Q2-Q1) |
| Marginal Utility per dollar | MU/$ = MU/P |
| Total Utility Approach | The highest number of TU when TU_Good1 and TU_Good2 are combined |
| Income effect | A higher price means your purchasing power is reduced, and so your income has effectively been reduced. Normal/inferior goods affect utility. |
| substitution effect | When a good becomes cheaper relative to others, you substitute towards it and vice versa. |
| Marginal Utility per dollar approach | highest MU/$ for each good that is the same MU/$ |
| What do firms strive to maximize | profit |
| What do firms do | take inputs (labor, capital, land, and component materials) and produce a more valuable output |
| perfect competition | Identical goods, many firms, firms can enter and exit market |
| Monopolistic Competition | Similar, but not identical goods, many firms, |
| oligopoly | identical or similar goods, few firms |
| Monopoly | Unique good, one firm, barriers to entry (patent, copyright) |
| Market structures | perfect competition, Monopolistic Competition, oligopoly, Monopoly |
| Total Revenue equation | TR = P x Q |
| Explicit Costs | Out of pocket costs (ex-wages, rent) |
| Implicit Costs | Opportunity Costs |
| Total costs | TC = Implicit Costs + Explicit costs TC = Fixed costs + Variable costs |
| Accounting Profit | TR - Explicit costs |
| Economic Profit | TR - Total costs (Both explicit and implicit), When we say profit in class we mean economic profit |
| Fixed Costs | Costs incurred no matter how much the firm produces (ex-rent) |
| Variable Costs | costs that are incurred in the act of production (ex-labor) |
| Average total cost / Average cost | total cost/quantity of output |
| Marginal cost | Additional cost of producing one more unit of output Equation: change in total cost/ change in quantity |
| Marginal Cost Curve | Upward sloping due to diminishing marginal returns, additional units are more costly to produce |
| Costs in the long run | In the long run, all costs are variable, fixed costs become variable |
| Diseconomies of scale | the firm is so large that it's difficult to manage, less Q for higher Price |
| When LR ATC curve has a clear minimum point | All firms are the same size |
| When LR ATC curve has a flat bottom | firms can be of varying size |
| Assumptions under perfect competition | 1) Many firms producing identical goods 2)Many buyers and many sellers 3) Perfect informational exchange 4) firms can enter and leave the market |
| Why are PC firms price takers | Firms cannot charge different prices, if a firm charges even one more dollar they will lose all customers. Instead they control Q |
| Less used way to optimize profit | greatest difference in TR exceeding TC on the graph |
| Marginal Revenue = ? in PC | price |
| Finding Profit maximizing point in PC | MR = MC |
| When to produce | Profit zone: MR > ATC Continue at a loss: AVC < MR < ATC Shut down zone: MR < AVC |
| Zero profits for PC firms in long run | Firms enter and exit the market influencing supply curve and price |
| MR/Price line in PC | Horizontal |
| Closed monopoly | a monopoly that is protected by legal restrictions on competition (e.g. J.K Rowling’s copyright on “Harry Potter”) |
| Natural monopoly | an industry in which long-run average cost is minimized when only one firm serves the market (e.g. distributing natural gas) |
| Open monopoly | a monopoly in which one firm is, at least for a time, the sole supplier of a product but has no special protection from competition (e.g. Sony’s first VCR). |
| Why is a monopoly a price maker | The monopoly controls P and Q |
| MR in Monopoly | Downward sloping |
| Is PC or M better for consumers and most efficient for maximizing society's desires? | Perfect Competition |
| Overall PC vs M | PC: Profit = 0, ATC = minimum(ATC), P=MC M: Profit > 0, ATC may not = minimum(ATC), P>MC |
| Why does M create DWL? | Total surplus falls because M could create more Q and sell yet does not want to in order to maximize profit at a higher P |
| M: ATC isn't minimized | disadvantage of M, This means the good could be produced at a lower cost if there was competition. |
| economies of scale | More Q for lower P |
Created by:
jaydenbehar4