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Econ chapter 14
| Question | Answer |
|---|---|
| Market basics and abbreviations | |
| What are the three characteristics of perfect competition? | Many buyers and sellers, essentially identical products, and free entry and exit. |
| What is a price taker? | A firm or buyer that accepts the market price. |
| Why can’t one competitive firm control price? | Buyers can purchase essentially identical products from many other sellers. |
| What do P and Q mean? | P: price per unit. Q: quantity produced or sold. |
| What is TR? | Total revenue: TR = P × Q. |
| What is AR? | Average revenue: AR = TR ÷ Q. |
| What is MR? | Marginal revenue: extra revenue from selling one more unit. MR = ΔTR ÷ ΔQ. |
| What is MC? | Marginal cost: extra cost from producing one more unit. MC = ΔTC ÷ ΔQ. |
| What is ATC? | Average total cost: ATC = TC ÷ Q. |
| What is AVC? | Average variable cost: AVC = VC ÷ Q. |
| What do FC, VC, and TC mean? | Fixed cost, variable cost, and total cost. TC = FC + VC. |
| What do SR and LR mean? | Short run and long run. |
| What does Δ mean? | “Change in.” |
| What relationship holds for a competitive firm? | P = AR = MR. |
| Why does MR equal price? | Each additional unit sells at the same market price. |
| Production and profit | |
| If MR > MC, what should the firm do? | Increase production because the additional unit adds profit. |
| If MR < MC, what should the firm do? | Reduce production because the additional unit costs more than it earns. |
| What is the usual profit-maximizing production rule? | MR = MC, on the rising part of MC, provided producing is worthwhile. |
| What does that rule become under perfect competition? | P = MC. |
| Does P = MC guarantee positive profit? | No. Compare P with ATC to determine profit or loss. |
| What is total profit? | TR − TC |
| What formula calculates profit using averages? | Profit = (P − ATC) × Q. |
| If P > ATC, what does the firm earn? | Positive economic profit. |
| If P = ATC, what does the firm earn? | Zero economic profit. |
| If P < ATC, what does the firm earn? | An economic loss if it produces. |
| P = $10, ATC = $6, Q = 50. What is profit? | ($10 − $6) × 50 = $200. |
| P = $3, ATC = $5, Q = 30. What is profit? | ($3 − $5) × 30 = −$60, a $60 loss. |
| What represents total profit on a graph? | A rectangle with height P − ATC and width Q. |
| What happens to the firm’s chosen quantity when price rises? | It increases along rising MC, assuming the firm produces. |
| Shutdown and exit — memorize these | |
| What is a shutdown? | A temporary short-run decision to produce nothing. |
| What is exit? | A long-run decision to leave the market. |
| What costs remain during a short-run shutdown in this model? | Unavoidable fixed costs. |
| What is the short-run shutdown rule? | Shut down if P < AVC. |
| Why compare price with AVC? | Revenue must cover variable costs for producing to be worthwhile in the short run. |
| What if AVC < P < ATC? | Keep producing in the short run despite a loss. Revenue covers variable costs and some fixed costs. |
| What if P = AVC? | The firm is indifferent between producing and shutting down. Either way, it loses its fixed costs. |
| What is the long-run exit rule? | Exit if P < ATC. |
| When will a new firm enter? | When P > ATC, so it can earn positive economic profit. |
| What is a sunk cost? | A cost already committed that cannot be recovered. |
| Should sunk costs affect current decisions? | No. Focus on revenues and costs that change with the decision. |
| What is the firm’s short-run supply curve? | The rising portion of MC at or above minimum AVC. |
| Market supply and the long run | |
| How do you calculate market quantity supplied? | Add the quantities supplied by all firms at the same price. |
| If 1,000 identical firms each supply 20 units, what is market supply? | 20,000 units. |
| What happens when existing firms earn positive economic profits? | New firms enter, market supply increases, and price falls. |
| What happens when existing firms incur losses? | Some firms exit, market supply decreases, and price rises. |
| Under the slides’ identical-firm assumptions, what is long-run equilibrium? | P = MC = minimum ATC, with zero economic profit. |
| Why do firms stay when economic profit is zero? | Revenue covers explicit costs and opportunity costs, including the owner’s time and investment. |
| Does zero economic profit mean zero accounting profit? | No. Accounting profit excludes implicit opportunity costs. |
| When is long-run market supply horizontal? | When firms have identical costs and entry or exit does not change those costs. |
| Why might long-run market supply slope upward? | Firms have different costs, or industry expansion raises input costs. |
| What happens immediately after demand increases? | Price rises, existing firms produce more, and firms may earn economic profits. |
| What happens later under the identical-cost assumptions? | Entry increases supply. Price returns to minimum ATC, while total market output increases. |
| Why is competitive equilibrium efficient in this model? | P = MC: the marginal unit’s value to buyers equals its production cost. |
Created by:
HoteboyMikyell