All Flashcards
Define 'Price Taker'.
A firm that accepts the market price and cannot influence it.
What does 'Entry' mean for a firm?
A firm starts producing and selling goods (quantity > 0).
What does 'Exit' mean for a firm?
A firm stops producing, but might still exist as a company (quantity = 0).
Define 'Fixed Costs'.
Costs that do not vary with the quantity of output produced in the short run.
Define 'Variable Costs'.
Costs that change as the firm alters its quantity of production.
What is 'Total Revenue (TR)'?
The total amount of money a firm receives by selling goods or services.
What is 'Total Variable Cost (TVC)'?
The sum of all costs that vary with the firm's level of output.
Define 'Average Variable Cost (AVC)'.
Total variable cost divided by the quantity of output.
Define 'Producer Surplus (PS)'.
TR - TVC. The difference between the market price and the minimum price a seller is willing to accept.
Define 'Normal Profit'.
The minimum profit necessary to keep a firm in operation; zero economic profit.
How does the shutdown rule apply to a restaurant during a slow season?
If the restaurant's revenue cannot cover its variable costs (e.g., food, hourly wages), it should shut down temporarily, only paying fixed costs (e.g., rent).
A firm's P < AVC. What should it do?
The firm should shut down production in the short run.
How do profits in an industry affect market entry?
Positive economic profits attract new firms to enter the industry, increasing supply.
How do losses in an industry affect market exit?
Economic losses cause firms to exit the industry, decreasing supply.
How does increased competition affect price?
Increased competition (more firms entering) leads to a rightward shift in supply, decreasing the market price.
How does decreased competition affect price?
Decreased competition (firms exiting) leads to a leftward shift in supply, increasing the market price.
What happens in the long run when firms are making economic profits?
New firms enter the market, increasing supply and driving down prices until economic profits are zero.
What happens in the long run when firms are making economic losses?
Firms exit the market, decreasing supply and driving up prices until economic losses are zero.
How does the shutdown rule relate to producer surplus?
If P < AVC, producer surplus is negative, indicating the firm should shut down to minimize losses.
How do market changes affect individual firm decisions?
Market supply and demand shifts impact the market price, which then affects the individual firm's decisions about production quantity and whether to enter or exit.
How would a subsidy affect firms in a perfectly competitive market?
A subsidy would lower costs, potentially leading to short-run profits and eventual market entry, increasing supply and lowering price.
What is the impact of a tax on firms in a perfectly competitive market?
A tax would increase costs, potentially leading to short-run losses and eventual market exit, decreasing supply and raising price.