Price Controls
A legal maximum price; when it’s set below equilibrium, it’s binding and creates a shortage.
What is a price ceiling?
A per-unit tax creates a wedge of this size between what buyers pay and sellers receive.
The tax amount per unit.
As variable inputs are added to a fixed input, the additional output eventually falls.
What is the Law of Diminishing Marginal Returns.
The relationship: TC = TFC + TVC and ATC = AFC + AVC.
What are Costs (total and per-unit).
In the long run, this curve traces the lowest attainable ATC across plant sizes.
The LRATC (long-run average cost) curve.
TR - Explicit Costs. TR - Explicit and Implicit Costs.
What are definitions of accounting vs. economic profit.
In the short run, a firm should shut down if this price relationship holds at the profit-max quantity.
What is P < AVC?
At a binding ceiling, this side of the market (quantity supplied or quantity demanded) determines how many units actually trade.
What is the quantity supplied?
When a tariff is enforced, producer surplus will
What is increase?
What is the definition of the production function?
It shows the relationship between inputs and output in the production process.
The per-unit cost curve that always falls as Q rises due to spreading overhead.
What is AFC?
When doubling all inputs more than doubles output.
Increasing returns to scale (economies of scale on costs).
When a firm earns zero economic profit, it is said to earn this.
Normal profit (break-even in economic terms).
The bottom of the LRATC curve is called this because it traces the lowest attainable ATC across different plant sizes.
What is Constant Returns to Scale?
A legal minimum price; when it’s set above equilibrium, it creates a surplus and fewer purchases.
What is a price floor?
With demand relatively inelastic and supply relatively elastic, who bears more of the tax burden?
Consumers.
The SR stage in which TP increases at a decreasing rate and MP is positive but falling.
Stage II: Diminishing returns.
The curve that intersects both AVC and ATC at their minimum points.
What is MC?
Define: Long Run
A period of time in which all resources can change
The universal output rule for profit maximization.
Produce where MR = MC.
The curve that intersects both AVC and ATC at their minimums.
What is MC (marginal cost)?
The calculation for finding the area of a triangle, such as DWL.
What is Area = 1/2 x Base x Height?
Why doesn’t a $4 per-unit tax raise the new buyer price by a full $4 above the old equilibrium price?
Because buyers and sellers share the burden; incidence depends on elasticities.
With fixed capital, why doesn’t total product rise at a constant rate as you hire more labor?
Because fixed resources constrain additional workers’ productivity.
A lump-sum increase in fixed cost affects which curves?
AFC and ATC (MC & AVC unchanged).
As firms become very large, coordination and monitoring costs can push LRATC up.
Diseconomies of scale.
What happens to total revenue if a perfectly competitive firm increases its price above the market equilibrium?
Total revenue drops to zero because no one buys from them.
This cost curve always falls as output rises because this type of cost is spread over more units.
What is AFC (average fixed cost)?
A floor is imposed below equilibrium. Predict the effect on price and quantity.
No effect (non-binding; equilibrium remains).
When a nation trades at the world market price (below equilibrium) rather than the domestic market price, consumer surplus does this.
What is increase?
Identify the stage when TP falls and MP becomes negative.
Stage III: Negative returns.
Define: Short Run
A period of time in which at least one resource is fixed
What's must be true if a firm is in economies of scale?
A) The LRATC decreases as output increases
B) The LRATC increases as output increases
C) The LRATC shifts right, towards the output
D) The LRATC shifts left, away from the output
A!
In perfect competition, firms enter the industry when this relationship between price and cost holds in the long run.
What is when P or MR > ATC?
What is the difference between total product and marginal product?
Total product is the total output produced, while marginal product is the additional output from adding one more unit of input.
FINAL JEOPARDY!!!
Life on the Margins
If a perfectly competitive firm is producing where the marginal revenue is less than the marginal cost, the the firm should do this:
What is decrease the quantity they are producing