in the short run:
firm supplies as long as P > AVC; firm shuts down if P < AVC
in the long run:
firm supplies as long as P > ATC; firm will exit if P < ATC
Economic Profit =
Revenue - explicit costs - implicit costs
Accounting Profit =
Revenue - explicit costs
VC =
TC - FC
ATC =
TC / Q
AFC =
FC / Q
AVC =
VC / Q
FC =
TC - VC
TC =
FC + VC
positive statements are statements of _____
fact
normative statements are statements of _____
opinion
top left of demand curve is
elastic
bottom right of demand curve is
inelastic
at the point between the two on the demand curve, elasticity of demand is
unit elastic
If the price elasticity of demand is greater than 1 then the good is
elastic
If the price elasticity of demand is less than 1 then the good is
inelastic
If the price elasticity of demand is equal to 1 then the good is
unit elastic
If the price elasticity of demand is infinity then the good is
perfectly elastic
If the price elasticity of demand is 0 then the good is
perfectly inelastic
if the income elasticity of the good is negative then the good is
inferior
if the income elasticity of the good is positive then the good is
normal
if the income elasticity of the good is less than 1 then the good is a
necessity
if the income elasticity of the good is greater than 1 then the good is a
luxury
if cross price elasticity of demand is negative then the goods are
complementary
if cross price elasticity of demand is positive then the goods are
substitutes
if cross price elasticity of demand is zero then the goods are
unrelated
total revenue =
price * quantity
List the determinants of price elasticity on demand:
substitutability, luxuries vs. necessities, definition of the market, and time
List the determinants of price elasticity on supply:
ability of producers to change the amount of good produced, time
goods with many close substitutes are much more _____ than those without any
elastic
price elasticity for luxuries is _____ than that of necessities
higher
narrowly defined goods have a _____ elasticity than broadly defined goods
higher
most manufactured goods are relatively _____
elastic
price elasticity is typically more _____ in the short run and more _____ in the long run
inelastic, elastic
if price increases, consumer surplus _____
decreases
if price decreases, consumer surplus _____
increases
if price increases, producer surplus _____
increases
if price decreases, producer surplus _____
decreases
list the demand curve shifts:
price of related goods, number of buyers, income (normal and inferior goods), taste and preferences, expectations
list the supply curve shifts:
number of sellers, input prices, technology, expectations
an increase in the number of buyers will _____ demand
increase
a decrease in the number of buyers will _____ demand
decrease
if you expect price to increase in the future you will _____ demand today
increase
increase in supply =
shift to the right, decrease in price, increase in quantity
decrease in supply =
shift to the left, increase in price, decrease in quantity
increase in the number of sellers will ______ quantity
increase
decrease in the number of sellers will _____ quantity
decrease
an increase in an input price will _____ the supply
decrease
a decrease in an input price will _____ the supply
increase
if a seller expects price to increase in the future, they will _____ supply
decrease
if a seller expects price to decrease in the future, they will _____ supply
increase
private good
excludable, rival
natural monopoly or club good
excludable, non-rival
common resource
non-excludable, rival
public good
non-excludable, non-rival
it is possible to prevent a consumer who has not paid for the good from consuming it
excludable
it is not possible to prevent a consumer who has not paid for the good from consuming it
non-excludable
one consumer's consumption of a good prevents another consumer's consumption
rival
one consumer's consumption of a good has no effect on others' ability to consume that good
non-rival
MC
change in total cost / change in quantity
AFC always ____ as quantity _____
decreases, increases
most efficient point of production occurs where _____ is minimized
ATC
economies of scale
long run ATC decreases as quantity of output increases
diseconomies of scale
long run ATC increases as quantity of output increases
constant returns to scale
long run ATC does not change as quantity of output increases
MR
change in total revenue / change in quantity
characteristics of perfect competition
many buyers and sellers, each firm produces an identical product, no barriers to entry
characteristics of a monopoly
firm is sole seller of its product, product has no close substitutes, price maker, faces a downward sloping demand curve, reduces price to increase sales, barriers to entry
characteristics of monopolistic competition
price setter, downward sloping demand curve, MR curve falls below demand curve, firm operates with excess capacity, many buyers and sellers, no barriers to entry, firm can't earn economic profit in the long run, long run equilibrium occurs where ATC is ta
effects of perfect price discrimination
eliminates dead weight loss, increases the quantity sold, increases a monopolist's profits
benefits of advertising
attracts buyers, keeps customers informed, increases competition, can act as a signal of quality, brand names can assure consumers of quality and provide incentives for firms to maintain good quality
downsides of advertising
increases ATC, can manipulate people's tastes, may make products appear that they are more different than they are