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EGC1

Marginal Analysis

QuestionAnswer
know why economic costs include both explicit costs and implicit costs The economic cost of using a resource2prd.a good/service is the value/worth that rsrce.would have its best alt.use.It incld.explicit cost,which flow2resources owned& supplied by others,&implicit costs,which R pymt.for the use of self owned&selfempy.rsrce.
explain how the law of diminishing returns relates to the firm's short-run production costs The law of diminishing returns describes what happens2output as a fixed plant is used more intensively.As successive units of a variable resource like labor R added to a fixed plant, beyond some point the MP associated w/each add. unit of a rsrce.declines
differentiate among fixed costs, variable costs, total costs, average costs, and marginal costs FC are costs that do not vary w/changes in output unlike VC that change w/the level of output. TC is the sum of fixed cost and variable cost at each level of output. AC is per-unit costs. MC is the extra,or add.,cost of producing one more unit of output.
explain the conditions required for purely competitive markets A purely competitive industry consists of a large number of independent firms producing a standardized product. Pure competition assumes that firms and resources are mobile among different industries.
describe why firms in any structure use the MR = MC rule of profit maximization Applying the MR(=P)=MC rule at various possible market prices leads to the conclusion that the segment of the firm’s short-run marginal-cost curve that lies above the firm’s average-variable-cost curve is its short-run supply curve.
law of diminishing marginal utility states that beyond a certain quantity, additional units of a specific good will yield declining amounts of extra satisfaction to a consumer.
utility the satisfaction or pleasure one gets from consuming
total utility the total amount of satisfaction or pleasure a person derives from consuming some specific quantity—for example, 10 units—of a good or service.
marginal utility The extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
rational behavior use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get “the most for their money” or, technically, to maximize their total utility.
budget constraint At any point in time the consumer has a fixed, limited amount of money income. Since each consumer supplies a finite amount of human and property resources to society, he or she earns only limited income.
utility-maximizing rule To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility.
consumer equilibrium When the consumer has “balanced his margins” using this rule, he has achieved consumer equilibrium and has no incentive to alter his expenditure pattern.
income effect the impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of that good.
substitution effect the impact that a change in a product’s price has on its relative expensiveness and consequently on the quantity demanded.
behavioral economics branch of economics that combines economics, psychology,&neuroscience to understand those situations when actual choice behavior deviates from the predicted,which incorrectly concluded that people were always rational,deliberate, & unswayed by emotions
status quo People judge good things and bad things in relative terms, as gains and losses relative to their current situation
loss averse that for losses and gains near the status quo, losses are felt much more intensely than gains—in fact, about 2.5 times more intensely.
prospect theory how consumers plan for and deal with life’s ups and downs as well as why they often appear narrow-minded and fail to “see the big picture.”
framing effects Changes in people’s preferences that are caused by new information that alters the frame used to define whether situations are gains or losses
anchoring The tendency people have to unconsciously base, or “anchor,” the valuation of an item they are currently thinking about on previously considered but logically irrelevant information.
mental accounting describe this behavior, because it was as if people arbitrarily put certain options into totally separate “mental accounts” that they dealt with without any thought to options outside of those accounts.
endowment effect which is the tendency that people have to put a higher valuation on anything that they currently possess (are endowed with) than on identical items that they do not own but might purchase.
economic cost the payment that must be made to obtain and retain the services of a resource. It is the income the firm must provide to resource suppliers to attract resources away from alternative uses.
explicit costs revealed and expressed costs i.e. payments made to outside suppliers
implicit costs Present but not obvious i.e. the opportunity costs associated w/ firms use of resources it owns
accounting profit Revenue - Explicit costs
normal profit The payment made by a firm to obtain and retain entrepreneurial ability; the minimum income entrepreneurial ability must receive to induce it to perform entrepreneurial functions for a firm.
economic profit Revenue - Explicit + Implicit costs
short run Fixed plant period, In microeconomics, a period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.
long run Variable plant period, In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed
total product (TP) Total quantity or output of a particular good or service produced
marginal product (MP) Extra output or added variable resource to production process i.e. labor MP=change in TP/change in labor input
average product (AP) The total output produced per unit of a resource employed (total product divided by the quantity of that employed resource).
law of diminishing returns As successive units of a variable resource are added to a fixed resource beyond some point the extra or marginal product that can attributed to each additional unit of the variable resource will decline
fixed costs Do not vary with changes in output
variable costs Change with level of output, reflects law of diminishing return
total cost TFC + TVC
average fixed cost (AFC) TFC/Q (output)
average variable cost (AVC) TVC / Q -derived from TVC -Decline then reach a minimum then increase -graph is U shaped or saucer shaped -reflects law of diminishing return -production is not efficient, costly at low levels of output
average total cost (ATC) TC/Q = TFC / Q + TVC / Q = AFC + AVC graphically - vertical difference between ATC and AVC
marginal cost (MC) Additional cost of producing one more unit of output MC = change in TC / Change in Q change to total variable expense resulting from one more unit change to output.
economies of scale Reductions in the average total cost of producing a product as the firm expands the size of plant (its output) in the long run; the economies of mass production.
diseconomies of scale Increases in the average total cost of producing a product as the firm expands the size of its plant (its output) in the long run
constant returns to scale Unchanging average total cost of producing a product as the firm expands the size of its plant (its output) in the long run-occur when a proportional increase in all inputs increases output by the same proportion, leaving average cost unchanged.
minimum efficient scale (MES) The lowest level of output at which a firm can minimize long-run average total cost
natural monopoly An industry in which economies of scale are so great that a single firm can produce the product at a lower average total cost than would be possible if more than one firm produced the product.
pure competition A market structure in which a very large#of firms sells a standardized product: -entry is very easy -individual seller has no control over the product price -there is no nonprice competition -market characterized by a very large # of buyers and sellers.
pure monopoly A market structure in which one firm sells a unique product -entry is blocked -single firm has considerable control over product price -non price competition may or may not be found
monopolistic competition A market structure in which many firms sell a differentiated product -entry is relatively easy -the firm has some control over its product price -there is considerable non price competition
oligopoly A market structure in which a few firms sell either a standardized or differentiated product. -entry is difficult -the firm has limited control over product price because of mutual interdependence -there is typically non price competition
imperfect competition All market structures except pure competition; includes monopoly, monopolistic competition, and oligopoly .
price taker Seller is unable to affect the price at which a product or resource sells by changing the amount it sells (or buys).
average revenue Total revenue from the sale of a product divided by the quantity of the product sold equal to the price at which the product is sold when all units of the product are sold at the same price
total revenue The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm -equal to the quantity sold (demanded) multiplied by the price at which it is sold.
marginal revenue Change in total revenue that results by selling one more unit -In pure competitions MR and price are equal
break-even point An output at which a firm makes a normal profit TR=TC
MR = MC rule The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
short-run supply curve A supply curve that shows the quantity of a product a firm in a purely competitive industry will offer to sell at various prices in the short run; the portion of the firm's short-run marginal cost curve that lies above its average-variable-cost curve.
long-run supply curve Price, but not real output, changes when the demand curves shifts, vertical supply curve that implies fully flexible prices.
constant-cost industry Expansion by the entry of new firms has no effect on the prices firms in the industry must pay for resources -no effect on production costs.
increasing-cost industry Expansion through the entry of new firms raises the prices firms in the industry must pay for resources -increases their production costs
decreasing-cost industry Expansion through the entry of firms lowers the prices that firms in theindustry must pay for resources -decreases their production costs.
productive efficiency Production of a good in the least costly way P=Minimum ATC -occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.
allocative efficiency apportionment of resources among industries to obtain the produc.of the products most wanted by society P=MC Achieved when every unit of every good whose marginal benefit= MC is produced& output level is charact. by max.combined consumer&producer surplus.
consumer surplus The difference between the maximum price a consumer is willing to pay for an additional unit of a product and its market price -the triangular area below the demand curve and above the market price.
producer surplus The difference between the actual price a producer receives and the minimum acceptable price -the triangular area above the supply curve and below the market price.
creative destruction The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies
pure monopoly A market structure in which one firm sells a unique product -entry is blocked -single firm has considerable control over product price -nonprice competition may or may not be found.
barriers to entry Anything that artificially prevents the entry of firms into an industry.
simultaneous consumption The same-time derivation of utility from some product by a large number of consumers.
network effects Increases in the value of a product to each user, including existing users, as the total number of users rises.
X-inefficiency The production of output, whatever its level, at a higher average (and total) cost than is necessary for producing that level of output
rent-seeking behavior The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense
price discrimination The selling of a product to different buyers at different prices when the price differences are not justified by differences in cost.
socially optimal price The price of a product that results in the most efficient allocation of an economy's resources and that is equal to the marginal cost of the product
fair-return price The price of a product that enables its producer to obtain a normal profit and that is equal to the average total cost of producing it.
monopolistic competition Market structure -Many firms sell differentiated product -entry is relatively easy -firm has some control over product price -there is considerable non price competition
product differentiation Strategy in which one firms product is distinguished from competing products by means of its design, related services, quality, location, or other attributes, excluding price
nonprice competition Competition based on distinguishing one's product by means of product differentiation and advertising the distinguished products to consumers
four-firm concentration ratio The percentage of total industry sales accounted for by the top four firms in the industry
Herfindahl index A measure of the concentration competitiveness of an industry calculated as the sum of the squared percentage market shares of the individual firms in the industry
excess capacity Plant resources that are underused when imperfectly competitive firms produce less output than that associated with achieving minimum average total cost
oligopoly Market structure -Few firms sell either standardized or differentiated products -entry is difficult -limited control over product price because of mutual interdependence (except when collusion exists -Typically non price competition
homogeneous oligopoly Oligopoly in which firms produce a standardized product
differentiated oligopoly Oligopoly in which firms produce a differentiated product
strategic behavior Self interested economic actions that take into account the expected reactions of others
mutual interdependence Change in strategy of one firm will affect the sales and profits of another firm. Rivals will react to these changes
interindustry competition Competition for sales between the products of one industry and the products of another industry
import competition Competition that domestic firms encounter from the products and services of foreign producers
game theory Means of analyzing the business behavior of oligopolists that use theory of strategy associated with games such as chess and bridge
collusion Situation in which firms act together and in agreement to fix prices, divide a market, restricting competition
kinked-demand curve Demand curve for a non collusive oligopolist based on the assumption that rivals will match a price decrease and ignore a price increase
price war Successive and continued decreases in price charged by firms in an oligopolistic industry. Each firm lowers its price below rivals hoping to increase its sales and revenues at its rivals expense
cartel Formal agreement among firms in an industry to set the price of a product and establish the outputs of the individual firms or to drive the market for the product geographically
price leadership Informal method that firms in an oligopoly may employ to set price of their product: one firm announces change in price other firms soon announce identical or similar changes
Created by: mmoreno12