CHAPTER 7
PRODUCTION & COSTS
PRODUCTION & COSTS
What is the definition of a firm?
AN ECONOMIC INSTITUTION THAT TRANSFORMS RESOURCES (FACTORS OF PRODUCTION) INTO OUTPUTS.
How is market structure determined in economics? What factors determine a firm's market?
Market structure Is determined by:
number of firms
nature of THE product
barriers to entry
control over price
Potential for long-run profit
What are the key characteristics of a Monopoly?
one firm.
no close substitutes for product.
significant barriers to entry.
substantial market power and control over price (monopolists are price makers).
potential long-run economic profit.
What are the characteristics of Monopolistic Competition?
many buyers and sellers.
differentiated products.
no barriers to market entry or exit.
some control over price.
no long-run economic profit.
What is the definition of a reservation wage?
THE LOWEST WAGE AT WHICH AN INDIVIDUAL IS WILLING TO WORK
What are the 3 types of firms?
SOLE PROPRIETORSHIPS
PARTNERSHIPS
CORPORATIONS
What are the 4 market structures?
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
OLIGOPOLY
MONOPOLY
How does a monopoly maximize its profit?
Producing at the point where MR = MC
What are the two types of marketing in monopolistic competition?
INFORMATIONAL: INFORMS CONSUMERS ABOUT ASPECTS OF A PRODUCT AND REDUCES SEARCH COSTS
PERSUASIVE: INFLUENCES CONSUMERS’ EMOTIONS AND TENDS TO DRIVE UP THE COST OF PRODUCTS
What is the substitution effect and income effect (with regards to labor)?
SUBSTITUTION EFFECT: WORKERS CHOOSE MORE HOURS AS WAGES INCREASE (OPPORTUNITY COST OF LEISURE INCREASES).
INCOME EFFECT: WORKERS CHOOSE FEWER HOURS AS WAGES INCREASE AND MORE HOURS WHEN WAGES DECREASE.
What is the key difference between accounting profit and economic profit?
Economic includes implicit costs and implicit benefits - accounting profit does not.
What are the characteristics of a Perfectly Competitive Market?
many buyers and sellers
homogeneous (nearly identical) products
no barriers to market entry or exit
no control over price (no market power)
no long-run economic profit
What is the main "cost" of a monopoly?
Under conditions of monopoly, the price will be higher and output will be lower than under competitive CONDITIONS.
This creates inefficiency in the market known as deadweight loss.
What are the characteristics of an Oligopoly?
relatively few firms.
MUTUAL Interdependence.
substantial barriers to market entry.
shared market power and considerable control over price.
potential for long-run economic profit.
What are the causes of shifts (left or right) in the supply of labor in the market?
demographic changes
nonwage aspects of jobs
wages in alternative jobs
nonwage income
What are the 3 types of costs calculated and analyzed in microeconomic cost curves?
Average Total Cost
Average Variable Cost
Marginal Cost
What is the PROFIT MAXIMIZING RULE (Condition) and how is it determined?
A FIRM MAXIMIZES PROFIT BY PRODUCING AT THE POINT WHERE MARGINAL REVENUE EQUALS MARGINAL COST (MR = MC ).
Define what is meant by "rent seeking" and "x-efficiency".
Rent Seeking: COSTLY ACTIONS (SUCH AS LOBBYING) TAKEN TO AVOID OR LIMIT COMPETITION
X-Efficiency: OCCURS WHEN MONOPOLIES SQUANDER (SUCH AS LAVISH RETREATS AND PERKS)
What is the definition of a cartel?
AN AGREEMENT BETWEEN FIRMS (OR COUNTRIES) TO FORMALLY COLLUDE ON PRICE AND OUTPUT, THEN AGREE ON THE DISTRIBUTION OF OUTPUT.
What are the 3 predominant ways labor is segmented in the market?
1. Dual labor market hypothesis: Labor market is split into primary and secondary sectors.
2. Job crowding hypothesis: Occupations are separated into predominantly male and female jobs.
3. Insider-outsider theory: Workers are segregated into union and nonunion sectors.
What are "economies of scale?" And how does the scale of change over time?
As a firm’s output increases, its long-run average total costs tend to fall - this is economy of scale.
At first costs fall (increasing economies of scale), before leveling off (constant economies of scale), and finally costs go up (decreasing economies of scale).
When should a firm keep operating at a loss and when should a firm "shut down" operations?
A firm should stay open if their MR > AVC but should shut down if they are losing money on a AVC basis.
What is meant by 1st, 2nd, 3rd degree price discrimination?
1st Degree: FIRMS CAPTURE ALL CONSUMER SURPLUS BY CHARGING EACH CONSUMER THE MAXIMUM EACH IS WILLING TO PAY.
2nd Degree: FIRMS CHARGE DIFFERENT PRICES BASED ON THE QUANTITY PURCHASED.
3rd Degree: FIRMS CHARGE DIFFERENT PRICES TO DIFFERENT GROUPS OF CONSUMERS ACCORDING TO THEIR ELASTICITIES.
What are the two main assumptions of Game Theory?
1. PREFERENCES ARE CLEARLY DEFINED: THE OBJECTIVES OF EACH PLAYER ARE WELL KNOWN.
2. PLAYERS RATIONALLY CHOOSE STRATEGIES TO ACHIEVE OBJECTIVES: PLAYERS MAKE DECISIONS THAT ARE CONSISTENT WITH THEIR GOALS.
What are the 3 types of "union" structures in the United States?
CLOSED SHOP: Only union members are hired.
UNION SHOP: Nonunion workers can be hired but must join the union within a specified time.
AGENCY SHOP: Nonunion workers may be hired but must pay dues for the union’s services.