Macroeconomics Ch. 13-15
Terms
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- According to the Law of Supply:
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- Firms are willing to produce and sell a greater quantity of a good when the price of the good is high
- This results in a supply curve that slopes upward. - Goal of a firm
- The economic goal of the firm is to maximize profits.
- Total Revenue
- the amount a firm recieves for the sale of its output.
- total cost
- the market value of the inputs a firm uses in production
- profit
- the firm's total revenue minus its total profit
- what is the cost of something?
- what you give up to get it
- what must the costs of producing an item include?
- all of the opportunity costs of inputs used in production
- explicit costs
- input costs that require a direct outlay of money by the firm
- implicit costs
- input costs that do not require an outlay of money by the firm
- what is the major way in whic accountants and economists differ in analyzing the performance of companies?
- accountants focus only on explicit costs, while economists examine both explicit and implicit costs
- how do economists measure profit?
- they measure it as total revenue minus total cost, including both explicit and implicit costs.
- how do accountants measure profit?
- they measure it as the firm's total revenue minus only the firm's explicit costs.
- what is the production function?
- it shows the relationship between quantity of inputs used to mkae a good and the quantity of output of that good.
- what is the short run?
- a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied.
- what is the long run?
- a period of time in which the quantities of all inputs can be varied.
- what is the marginal product?
- the increase in output that arises from an additional unit of that input.
- what is the equation of marginal product of labor?
- marginal product of labor = (change in output)/(change in labor)
- what is diminishing marginal product?
- the property whereby the marginal product of an input declines as the quantity of the input increases.
- as the amount of labor used increases, what falls?
- the marginal product
- what are fixed costs?
- costs that do not vary with the quantity of output produced.
- what are variable costs?
- costs that do vary with the quantity of output produced
- what is the average total cost?
- (total cost) / (quantity of output)
- what is the average fixed cost?
- (fixed costs) / (quantity of output)
- what is the average variable cost?
- (variable cost) / (quantity of output)
- what is the marginal cost?
- the increase in total cost that arises from an extra unit of production.
- what is a competitive market?
- a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
- what are the characteristics of a perfectly competitve market?
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1) there are many buyers and sellers in the market
2) the goods offered by the various sellers are largely the same
3) firms can freely enter or exit the market - what must buyers and sellers accept?
- the price determined by the market
- total revenue equals
- (selling price) x (quantity sold)
- how can firms in perfect competition change their level of total revenue?
- by varying their level of output because they have no ability to change the price
- what is marginal revenue?
- the change in total revenue from an additional unit sold
- average revenue is always equal to...
- price
- marginal revenue is equal to...
- price only for firms who operate in perfectly competitve firms
- what does average revenue tell us?
- how much revenue a firm recieves for the typical unit sold
- the marginal cost curve is ___ sloping
- upward
- the average total cost curve is ___ shaped
- U
- the marginal total cost curve crosses the average total cost curve where?
- at the minimum of average total cost
- marginal and average revenue can be shown how at the market price?
- by a horizontal line
- what is a shutdown?
- it refers to a short-run decision not to produce anything during a specific period of time because of current market conditions
- what is an exit?
- a long-run decision to leave the market
- when should a firm shut down?
- when the revenue it gets from producing is less than the variable cost of production
- when should a firm exit?
- when the revenue it would get from producing is less than its total cost
- what is a competitive firm's long-run supply curve?
- the portion of its marginal-cost curve tha tlies above average total cost
- what is short-run supply curve?
- the portion of its marginal cost curve that lies above average variable cost
- what is the long-run supply curve?
- the marginal cost curve above the minimum point of its average total cost curve
- a competitive firm is a price ____
- taker
- a monoploy firm is a price ___
- maker
- a firm is considered a monopoly if
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1) it is the sole seller of its product
2) its product does not have close substitutes - what is the fundamental cause of monopoly?
- barriers to entry
- what are the three causes of barriers to entry?
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1) ownership of a key resource
2) the government gives a single firm the exclusive right to produce some good
3) costs of production make a single producermore efficient than a large number of producers - what are two examples of how a government creates a monopoly to serve the public interest?
- patent and copyright laws
- what is a natural monopoly?
- when a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms
- 4 characteristics of a monopoly
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1) is the sole producer
2) faces a downward-sloping demand curve
3) is a price maker
4) reduces price to increase sales - 4 characteristics of a competitive firm
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1) is one of many producers
2) faces a horizontal demand curve
3) is a price taker
4) sells as much or as little at the same price - what is the key differnce between a competitive firm and a monopoly?
- the monopoly's ability to control price
- a competitive firm faces a perfectly ___ demand at the market price.
- elastic
- a monopolists' marginal revenue is always ___ ___ the price of its good. the demand curve is ___ sloping
- less than; downward
- what is the output effect?
- when the monopolist sells one more unit, his total revenue (P x Q) will rise because his Q is getting larger
- what is the Price effect?
- when the monopolist sells one more unit, he must lower price. this means his total revenue will fall because P is getting smaller.