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117 Cards in this Set
- Front
- Back
production
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process by which inputs are combined, transformed, and turned into outputs
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firms are the demanders in __markets and and suppliers in __markets
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input, output
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firm
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organization existing to produce a good or service to meet a percieved demand
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perfect competition (4)
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an industry in which there are:
small firms producing identical products no price control: price takers freely exit/enter market |
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homogeneous products
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undifferentiated products. identical
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supply, demand curves for the market and individual firm
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cross lines vs straight line
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primary objective of firms
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profit maximization
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firm decisions
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1. how much output to supply
2. how to produce that output 3. how much of each input to demand |
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profit (economic profit)
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difference between total revenue and total cost
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total revenue
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amount recieved from the sale of the product (Q x P)
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total cost
total economic cost |
total explicit costs
total explicit costs plus implicit costs out of pocket costs normal rate of return costs opportunity costs |
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normal rate of return
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rate of return on capital that is sufficent to keep owners and invenstors satisfied.
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implication of normal rate of return
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firms in a perfectly competitive industry will earn zero economic profit
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short run
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period where
fixed factor of production firms can neither exit or enter industry |
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long run
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no fixed factors of production
increase/decrease production firms can enter/exit industry |
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the bases of firm production techniques
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1. market price of output
2. the techniques of production that are available 3. the price of outputs |
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production technology
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quantitative relationship between inputs and outputs
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labor intensive technology
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technology that relies heavily on human labor
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capital intensive technology
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technology that relies heavily on capital instead of human labor
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choice of technology
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one that minimizes costs
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production function or total production function
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a numerical or mathematical expression of a relationship between inputs and outputs. it shows units of total products as a function of units of inputs.
*** The production function inherently represents the mathematical relationship between the levels of inputs (capital, labor) and the output (Q). It thus suggests that quantity production can be considered a function of the levels of inputs used. |
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marginal product
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the additional output that can be produced by adding one more unit of a specific input
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law of diminishing returns
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when additional units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines
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average product
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the average amount produced by each unit of a variable factor of production
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average product of labor equation
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total product/total units of labor
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marginal product
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additional output produced by hiring one more unit of a specific input
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average product
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average amount produced by each units of a variable factor of production
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production technology
INPUTS: complements substitutes |
bakers and ovens
weavers and looms |
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fixed costs
aka |
any cost that does not depend on the firms level of output. these costs are incurred even if the firm is producing nothing. there are no fixed costs in the long run
overhead |
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marginal product of labor equation
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change quanitity/change labor
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average product of labor
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Q/L
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variable costs
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costs that depend on the level of output chosen
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total costs
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TFC + TVC
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average fixed costs equation
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TFC/Q
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sunk costs
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another name used for fixed costs in the short run becuase firms have no choice but to pay them
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TVC
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sum of price of different units of labor
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spreading overhead
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dividing total fixed costs by units products. this number decreases
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total varaible costs
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costs that vary with output in the short run
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marginal costs
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increase in total cost that results from producing one more unit of output.
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Delta TVC= ?
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MC
*** Marginal cost represents the change in cost as a result of producing one additional unit of a good. Since Fixed Costs stay the same across all quantities produced, the only change in costs would have to be resulting from increases in variable costs. Thus, to measure the change in cost (MC), one need to measure the change in TVC from a particular quantity to one unit more of that quantity. (Remember, delta equals change). |
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relationship between AVC and MC
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when MC<AVC, AVC falls
when MC>AVC, AVC rises when MC=AVC, AVC is at a min |
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total cost
average total cost |
TC= TFC + TVC
ATC=AFC+AVC |
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ATC and MC relationship
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when MC<ATC, ATC falls
when MC>ATC, ATC rises when MC=ATC, ATC is at a minimum |
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total revenue
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the total amount a firm takes in from the sale of the product
price x quantity |
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marginal revenue
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additional revenue that a firm takes in when it increases output by one additional unit
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when will a firm stop producing
what happens when MR>MC |
when MR=MC
firm will expand production |
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the marginal cost curve of a competitive firm is the firms
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short run supply curve
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rate that is just sufficient to keep current investors in the industry
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normal rate of return
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breaking even
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situation where firm is earnign exactly a normal rate of return
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operating profit/loss or operating revenue
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total revenue minues total variable costs
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shut down point
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lowest point of AVC curve.
*** If P<AVC, a firm will be incurring an operating loss; in other words, the firm cannot even cover their variable costs in the short-run. Thus, they'd be better off shutting down immediately in the short-run in that situation (P<AVC). |
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short run industry supply cuve
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sum of all marginal costs curve (above AVC)
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what is a firms short run supply curve?
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marginal cost curve above AVC curve
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what to do when
TR>TC TR>=TVC TR<TVC |
operate/expand
operate/contract (exit) shut down/contract (exit) |
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increasing returns to scale or economies of scale
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increase in a firms scale of production leads to lower costs per unit produced
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constant returns to scale
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increase in firms scale of production has not effect on costs per unit produced
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decreasing returns of scale/ diseconomies of scale
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increase in firms scale of prudction leads to higher costs per unit produced
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long run average cost curve
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a graph that shows the different scales on which a firm can choose to operate in the long run
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constant returns
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relationship between amount of outpuit and input stay constant
(double output=double input) |
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optimal scale of plant
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scale of plant that minimizes average cost
*** Optimal scale of the plant regards the idea that, in the long-run, firms must choose the labor and capital combinations that minimize long-run average costs. Thus, suppose we have two firms that, in the long-run, select two different combinations of inputs. Firm A selects a combination that has a LRAC = $9. Firm B selects a different combination that has a LRAC = $8. Since Firm B is producing more cheaply, they can afford to offer the product at a lower cost (P*=$8) in the market; this is a huge problem for Firm A, since they can't set price at that level or they'll lose money (and eventually exit). Thus, it is imperative that firms operate at the point of lowest LRAC as a means of not being undercut by their competitors. The selection of that point -- the combination of capital and labor inputs that get us there -- is considered the optimal scale of the plant. |
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long run competitive equilibrium
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when p=srmc=srac=larc and profits are zero
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input markets
demander suppliers |
firms
households |
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derived demand
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firms only enter when there is a demand for their output
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productivity
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productivity of an input is the amount of output produced per unit of the input
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marginal revenue product
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additional revenue generated by employing one more unit of an input
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firms will hire more input as long as...
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MRP l > MC l
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in a perfectly competitive market...
MC l and wage |
MC l= wage
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is their such thing as a singular labor market
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no
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balkanization of the labor market
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regional and occupational barriers that give impression of seperate labor markets
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what happens to...
product price marginal revenue product firms hiring workers when demand increases/decreases |
rise/fall
increase/decrease hire more/less |
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firm will rent land when it is profitable to do so
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MRPa>Pa
*** This condition denotes that the additional revenue to renting a unit of land exceeds the price of renting that unit of land. |
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capital goods
types of capital |
those goods used as input to produce other hoods and services
phyiscal- equip. factories, etc social- infrastrcture intangible: human capital |
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investment
measures as a __ |
new capital additions to a firms capital stock
flow, or change, over time |
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depreciation
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the decline of an assets economic value over time
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captial markets
demanders supplier |
firms
households |
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interest
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income recieved by households in order for them to supply (deposit/invest) their money
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expected rate of return
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annual rate of return a firm expects to obtain through a capital investment
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opportunity costs of investment
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even by default, firm could invest money and expect to recieve the going interest rate in return
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how is the price of land set
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pureley on demand
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partial equilibrium analysis
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examining the equilibrium conditions with an individual market for households and firms seperatley
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general equilibrium
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condition that exists when all markets in a economy are in simultaneous equilibrium
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efficiency
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condition in whcih economy is producing twhat people want at least possible cost
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pareto efficiency
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occurs when the reallocation of resoucres leaves some people better off without making any other individual worse off
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pareto optimality
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the point of the economy where resources cannot be reallocated in such a neabs to conform to pareto efficiency
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firms will operate at the point of least cost on which line
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LRAC
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people will buy goods and services that generate utility greate than __ __
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market price
Ugood>Umoney |
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profit maximization occurs when
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P=MC
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market failure
4 causes |
occurs when resources are missallocated, or allocated inefficently
imperfect market structure public goods external costs/benefits imperfect information |
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imperfect competition
ex |
industry where firms have some control over price and competition
utilities |
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public goods
ex |
goods or services that bestow collective beneifts on memebers of society
private industry will not produce all goods people want national defense |
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private goods
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products produced by firms for sale to individual households
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externalities
ex |
social cost or beneift result from some activity or transaction that is imposed on parties outside the activity or transaction
pollutio |
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tort law
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those who impose externalities are held accountable to them
body of rules that deals with third party effects |
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imperfect information
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absence of full knowledge concerning product characteristics, available prices, and so forth
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imperfectly competitive industry
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an industry in which single firms have some control over the price of their output
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market power
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imperfectly competitive firms ability to raise price without losing all of the quanity demanded for its product
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monopoly
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industry consisting of a single firm
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pure monopoly
(3) |
industry with a single firm that produces a product for which there are no close subs and which there are sig barriers of entry.
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barrier to entry
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something that prevents new firms from entering and competing in imperfectly competitive industries
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government franchise
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a monoploy by viter of government directive (utilities)
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patent
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barrier of entry that grants exclusive use of the patented product or process to the inventor
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economies of scale and barriers to entry
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large capital investments requirements are often a barrier to entry
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ownership of a scarce factor of production
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owning something that doesnt exist anywhere else (diamon mines)
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4th quanity of production a imperfectly competitive firm deals with
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what price to charge
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price discrimination
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selling to differnt consumers or groups at different prices
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for a monopolist, increase in output involed not just producing more and selling it, but __the price
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reducing
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collusion
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the act of working with other producers in an effort to limit competition and increase joint profits
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rent seeking behavior
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actions taking by households or firms to preserve positive profits
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government failure
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situation where government becomes the cause of rent seeking behavior
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public choice theory
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an economic theor that public officials who set economic policies and regulate the players act in their own self interest, just as firms do
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price discrimination
perfect price discrimination |
charging differnt prices to differnt buyers
occurs when a firm charges the maximum amount that buyers are willing to pay for each unit |
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TC=
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TFC + TVC
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profit equation
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TR - TC
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where is the short run supply curve for a short run compeitive industry graph
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the MC line above the AVC intersection point
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operating loss vs operating profit
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whether or not a firm is still losing money from simply operating
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production function
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Q=f(K,L)
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TC=
AFC= AVC= ATC= |
TFC+TVC
TFC/Q TVC/Q TC/Q |