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Max profit the firms goal. total revenue-total cost
Total revenue the amount a firm recieves from the sale of its output
Total cost the market value amount paid of input
Explicit costs require an outlay of money. EX. paying wages to workers
Implicit costs do not require a cash outlay. the opportunity cost of the owner's time
Accounting profit total revenue minus total explicit cost
Economic profit total revenue minus total costs including implicit and explicit
Production function shows the relationship between the quantity of inputs used to produce a good and the quantity of output of that good
marginal product of any input the increase in output arising from an additional unit of that input, holding all other inputs constant
Delta (triangle) change in
Marginal product of labor delta Q/delta L
Diminishing marginal product the marginal product of an input declines as the quantity of the input increases
Marginal Cost the increase in total cost from producing one more unit. delta TC/Delta Q
Fixed Costs do not vary with the quantity of output produced. ex. cost of equipment, loan payments, rent
Variable costs vary with the quantity produced
Total cost Fixed cost plus Variable cost
Average fixed cost fixed cost divided by the quantity of output. falls as Q rises since the firm spreads the costs over larger number of units
Average total cost equals total cost divided by the quantity of output
Average Variable cost variable cost divided by the quantity of output. eventuallly will rise as output rises.
ATC graphing initially falling AFC pulls ATC down but eventually rising AVC pulls ATC up
Efficient scale the quantity that mimics ATC
MC ATC is falling
MC>ATC ATC is rising
cost in the short run some inputs are fixed. the costs of these inputs are FC
cost in the long run all inputs are variable. ATC at any Q is cost per unit.
Economies of scale ATC falls as Q increses
Constant returns to scale ATC stays the same as Q increases
Diseconomies of scale ATC rises as Q increases
Economies of scale occur increasing production allows greater specialization. Workers a more efficient when they work on a narrow task. more common when Q is low.
Diseconomies of scale occur coordination problems in large organizations. most common when Q is high
Characteristtics of perfect competition many buyers and many sellers, the goods offered for sale are largely the same, firms can freely enter and exit the market
price taker takes the price as given
Total revenue PxQ
Average revenue TR/Q or P
Marginal revenue delta TR/ Delta Q
MR=P only true for firms in competitive markets
To increase Q by one unit revenue rises by MR, and Cost rises by MC
MR>MC increase Q to raise profit
MR reduce Q to raise profit
The MC curve the firms supply curve
Shutdown A short-run decision not to produce anything because of market conditions
Exit A long-run decision to leave the market
Difference between shutdown and exit if firm shuts down in short run must still pay FC. If exit in long run, zero counts
cost of shutting down revenue lost=TR
befefits of shutting down cost savings=VC. must still pay FC
shut down if P
short run supply curve the portion of the MC curve that is above AVC
Sunk cost a cost that has already been committed and cannot be recovered. must pay them regarless of your choice. FC is a sunk cost.
cost of exiting the market revenue loss=TR
benefit of exiting the market cost saving=TC. zero FC in the long run
exit the market if P
enter the market for the long run if TR>TC and divide both sides by Q
the long run supply curve the portion of its MC curve above LRATC
all existing firms and potential entrants have identical costs
each firm's cost do not change as other firms enter or exit the market
the number of firms in the market in the short run is fixed due to fixed costs
the number of firms in the market in the long run is variable due to free entry and exit
profit maximizing quantity P greater than or equal to AVC where MR=MC
positive economic profit as new firms enter the market, supply shifts right. when P falls, reduces profits and slows entry
incur losses some firms exit, supply shifts left. p rises, reducing remaining firms losses
long-run equilibrium the process of entry or exit will continue until the remaining firms earn zero economic profit
zero economic profit P=ATC
P= minimum ATC
Long run market supply curve horizontal at P=min ATC
Long run supply curve is horizontal if all firms have identical cost and costs do not changee as other firms enter or exit the market
the entry of new firms increases demand for this input, causing price to rise which increases all firms costs
monopoly a firm that is the sole sellers of a product without close subsitutes
difference between monopoly and perfect competition market power
main cause of monopolies barriers to entry. other firms cannot enter the market
Three sources of barrier to entry a single firm owns a key resource, the government gives a single firm the exclusive right to produce a good, natural monopoly
natural monopoly arises when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
monopolist's demand curve slopes downward. to sell a larger Q, the firm must reduce P
output effect higher output raises revenue
price effect lower prices reduces revenue
a sraight line demand curve MR curve is twice as steep as the demand curve
monopolists's price the highest price consumers are willing to pay for that quantity. found from the demand curve
profit maximizing Q where MR=MC. and P is found from the demand curve at this Q
costs in the short run:monopolists incur
costs in the long run: monopolists exit the market
price maker monopolists ability to create their own price
Supply curve for monopoly none
when patents expire the market become competitive and generics appear
monopolists equilibrium the value to buyers of an additional unit exceeds the cost of the resources needed to produce the unit
price discrimination selling the same good at different prices to different buyers. willingness to pay is a characteristic
perfect price discrimination the monopolist captures all CS as profit but there is no deadweight loss
why perfect price discrimination wont work no firm knows every buyers willingness to pay and buyers do not announce it to sellers
increasing competition with antitrust laws sherman antitrust act and clayton act. ban some anticompetition practices and allow the government to make up the monopolies
regulation of monopolies government agencies set the monopoly prices.
public policy on monopolies increasing competition with antitrust laws, regulation, public ownership, and doing nothing
oligopoly only a few sellers offer similar or identical products
monopolistic competition many firms sell similar goods but not identical
characteristics of monopolistic competition many sellers, product differentiation, free entry and exit. zero economic profit in the long run. firms have market power. the demand curve is downward sloping. many close substitutes ex. apartments, books, bottled water, clothing etc.
characteristics of perfect competition many sellers. free entry and exit. zero long run economic profits. products are identical. no market power. D curve is horizontal
characteristics of monopoly one seller. free entry and exit. positive long run economic profits. has market power. demand curve is downward sloping. no close substitutes for the product
monpolistic competition P MR=MC since usually P>AVC
in the long run monopolistic competition entry and exit drive economic profits to zero
If a monopolistic competition profits in the short run new firms enter the market which takes some demand away from existing firm decreases prices and profits fall
If a monopolistic competition losses in the short run some firms exit the market remaining firms enjoy higher demand
why monopolistic competition is less efficient excess capacity, mark up over marginal cost
the product-variety externality surplus consumers get from the introduction of new products
the business-stealing externality losses incurred by existing firms when new firms enter market
the more differentiated the products the more advertising firms buy
critics of advertising society is wasting the resources it devotes to advertising, firms advertise to manipulate people's tastes, advertising impedes competition
defense of advertising it provides useful information to buyers, informed buyers can easily find and exploit differences, advertising promotes competition
firms with brand names usually spend more on advertising, and charge higher prices for the products
critique of brand names brand names cause consumers to percieve differences that do not actually exist, willingness to pay is irrational and fostered by advertising, eliminating government protection of trademarks would reduce influence of brand names and lower prices
defense of brand names provide information about quality, incentive to maintain quality to protect the reputation of brand names
concentration ratio the percentage of the market's total output supplied by its four largest firms
strategic behavior in oligopoly a firm's decision about P and Q can affect other firms and cause them to react. the firm will condsider these reactions when making decisions
game theory the study of how people behave in strategic situations
duopoly an oligopoly with two firms
collusion an agreement among firms in a market about quantities to produce or prices to charge
cartel a group of firms acting in unison
collusion vs self-intrest it is difficult for oligopoly firms to form cartels and honor their agreement
Nash Equilibrium economic participants interacting with one another. each choose their best strategy given the strategies that all the others have chosen
oligopoly Q is greater than monopoly Q but smaller than competitive Q
oligopoly P is greater than competitive P but smaller than monopoly P
output effect if P>MC selling more output raises profits
price effect raising production increases market quantity, which reduces market price and reduces profit
output effect>price effect the firms increase production on all units sold
price effect>output effect the firm reduces production
number of firms in the market increases (oligopoly) the price effect becomes smaller and the oligopoly looks more like a competitive market. the market quantity approaches the socially efficient quantity
benefit of international trade trade increases the number of firms competing, increases Q, brings P closer to marginal cost
Game theory helps us understand oligopoly and other situations where "players" interact and behave strategically
dominant strategy a strategy that is best for a player in a game regardless of the strategy chosen by the other players
Prisoners' dilemma a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial
Oligopolies as a prisoners' dilemma when oligopolies form a cartel in hopes of reaching the monopoly outcome, they become players in the prisoner dilemma
Prisoners' dilemma and society's welfare prevents them from achieving monopoly profits. Q is closer to the socially efficient
strategies lead to cooperation if your rival reneges in one round, you renege all subsequent rounds. whatever your rival does in one round you do in the following round
Role for policymakers for oligopolies promote competition, prevent cooperation, move the oligopoly outcome closer to the efficient outcome
Sherman Antitrust Act forbids collusion between competitors
clayton antitrust act strengthened rights of individuals damaged by anticompetitive arrangements between firms
resale price maintenance "fair trade" a manufacturer imposes lower limits on the prices retailers can charge. appears to reduce competition. preventing discount retailers from free-riding on the services provided by full service retailers
Predatory pricing a firm cuts prices to prevent entry or drive a competitor out of the market, so that it can change monopoly prices later. it involves selling at a loss, which is extremely costly for the firm. potential entrants make it less likely to recover the loss
tying a manufacturer bundles two products together and sells them for one price. for price discrimination, which is not illegal, and which sometimes increases economic activity
factors of production the inputs used to produce goods and services
capital the equipment and structures used to produce goods and services
derived demand derived from a firm's decision to supply a good in another market
We assume... all markets are competitive/the typical firm is a price taker. AND that firms care only about maximizing profits
wage price of labor
production function the relationship between the quantity of inputs used to make a good and the quatity of output of that good
marginal product of labor the increase in the amount of output form an additional unit of labor. MPL=delta Q/delta L
value of the marginal product the marginal product of an input times the price of the output. PxMPL
to maximize profits hire workers up to the point where VMPL=W
VMPL curve the demand curve
anything that increases P or MPL will increase VMPL
Things that shift the labor demand curve changes in the output price, technological change (affects MPL), the supply of the other factors (affects MPL)
Marginal Cost cost of producing an additional unit of output. delta TC/delta Q.
As L rises MPL falls, causing W/MPL to rise causing MC to rise.
Things that shift the labor supply curve change in taste or attitude regarding the labor-lesiure tradeoff, opportunities for workers in other labor markets, immigration
wage always equal VMPL
wage is tied to labor productivity
purchase price the price a person pays to own that factor indefinently
rental price the price a person pays to use that factor for a limited period of time. wage is a rental price
decide how much land to rent by comparing the price with the value of the marginal product (VMP) of land. price adjusts to balance supply and demand.
rental income equals VMP
equilibrium purchase price depends on both the current VMP and the VMP expected to prevail in future periods
having more capital makes workers more productive MPL and W will rise
Created by: missmissie



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