- ("Unnatural") Monopoly
- Price maker (firm's ability to set prices above market demand), barriers to entry are massive, monopolies will always sell at inelastic part of demand curve
- Barriers of entry
- The cost businesses face when wanting to make an industry.
- Break even point
- When revenues are equal to costs and profit is zero. ATC intersects MC.
- Characteristics of a Perfectly Competitive Market
- No profit, Non-existant, All products are identical, No barriers of entry, Price taker (businesses have to take whatever price we want to pay)
- Contingency Fund
- Fixed dollar value to offset unforseen damages
- Economies of Scale
- Where output increases more than the proportional increase in inputs. Decreases in long-run average costs because of efficiency of large-scale production. Explain why costs go up and down.
- Economies of scale at the firm level:
- As your revenue goes up and the co. makes more money, the salaries of administration are less (relatively speaking..percentage wise) and you pay less to them
- Economies of scale at the plant level:
- Using specialization will lead to large increases in production, which reduces per unit cost (of workers) and increase per unit revenue.
- Economies of scale at the product level:
- Use more specialized equipment, connected to specialization
- Firm Theory
- Analyzes the organization of a business from the perspective of Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly.
- Fixed Costs
- Costs that do not vary/change with production. They must be paid whether or not the firm produces. (i.e. property tax, insurance, rent)
- Formula for Average Fixed Cost (AFC)
- AFC = TFC/Q (represents production) = ATC - AVC
- Formula for Average Total Cost (ATC)
- ATC = AFC + AVC = TC/Q
- Formula for Average Variable Cost (AVC)
- AVC = TVC/Q = ATC - AFC
- Formula for profit
- Profit = Total Revenue - Total Costs
- Formula for Total Revenue (TR)
- TR = Price x Quanitity
- In order to make profit: (the formula)
- Total Revenue - Total Costs. Revenue must be larger than costs.
- In our first graph, where is the shut down point and the break even point?
- Shut down point is when AVC intersects MC. Break even point is when ATC intersects MC.
- In our first graph, why does MC increase as ATC decrease at first?
- Because the increase in MC is not big enough to impact ATC to the point where it changes direction. MC will later increase and get steeper and thus stops ATC from decreasing and make it go up. (Specialization minimized, law of dmr sets in)
- In our very first graph, why does the ATC and AVC curve increase right after they intersect MC?
- As you produce more, law of diminishing retuns sets in, which is when the curves increase. Specialization exists when the curves were decreasing but doesn't when MC intersects
- In our very first graph, why is the AFC curve steep at first?
- Cost is fixed. As you produce more (increase level of output), the average fixed cost decreases. Fixed Cost remains the same (AFC = TFC/Q = 1000/1). As Q gets bigger, the AFC gets smaller, which is why it declines and gets closer to the x-axis.
- In our very first graph, why is the ATC curve declining in the beginning?
- For little output, the cost goes down alot until a certain point when MC intersects ATC. (This means you are being efficient because you're using specialization)
- Long Run
- A period of time where all resources are variable (and therefore can be changed). The goal is to increase profit. Also called 'planning period'.
- Monopolies always produce ____ than a PC market
- less
- Natural Monopololy
- Businesses that already have the supply lines ready to produce a product & multiple producers may negatively impact product quality.
- Note: Specialization needs ______
- technology
- Short Run
- A period of time where only one resource is fixed
- Shut down point
- when costs are greater than revenue and you are making negative profit.
- Sunk Cost
- One that is never regained. (i.e. an initial business investment. If you purchase a business for $1 mil, you're never gonna get that back)
- The 3 levels of economies of scale:
- Product, plant, and firm levels.
- Theory of the Firm
- Producers are all profit-maximizers. Related to self-interest: increase revenue and decrease costs
- Variable Costs
- Costs that do change/vary with production
