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EC142 Microeconomics Final Review With Correct Answers Rated 100- Correct_.pdf
EC142 Microeconomics Final Review
Jeremiah
Practice questions for this set
Terms in this set (59)
The decisions of individual buyers and sellers have no effect on prices. The firm is a
Characteristics of Perfect Competition
price maker. An Industry where many small firms produce a nearly identical product.
Perfectly Elastic The demand curve for a perfectly competitive market is a horizontal line.
Unitary Elastic A price change leads to no change in the demand for the product
Perfectly Inelastic When the price changes and there is no change in demand
A one percent change in price leads to a greater than one percent change in demand.
Elastic Demand In elastic demand, when price is reduced, total revenues rise. The larger the number of
substitutes, the greater the elasticity.
Inelastic Demand A one percent change in price leads to a less than one percent change in demand.
Total Cost Total Cost (TC) = (AVC + AFC) X Output (Which is Q); is fixed cost plus variable cost.
Total Fixed Cost (TFC) = TC - TVC.
Average Fixed Cost (AFC) = ATC - AVC.
Fixed Costs are costs that must be paid whether or not a product is produced; loans, capital
equipment, utilities, salaries of seniot management and staff. Also called operating
costs. *Fixed costs do not vary with output*
Average Variable Cost (AVC) = Total Variable Cost / Q.
Variable costs Total Variable Cost (TVC) = AVC X Output.
Variable Costs vary with changes in inputs. In the long run all costs are variable costs.
Total Revenue Total Revenue (TR) = Price X Quantity
Producing one more unit. The change in total production associated with producing
Marginal Product
one more unit.
Marginal Cost (MC) = Change in Total Costs / Change in Output; the increase in total
Marginal Cost
costs from producing one more unit.
are the difference between total cost and price. They are the rewards for innovation
Profits and risk taking by true entrepreneurs. are a signal to producers that they are meeting
consumers needs*
The point at which a firm earns normal or accounting profits. *When total revenues
Short-Run Breakeven (TR=TC)
equal total costs there are accounting profits only*
MR=MC: Mariginal Revenue at its highest, marginal cost at its lowest. TR minus implicit
costs. A profit in excess of accounting profits is called accounting profits. Economic
Profits are above accounting profits and include accounting profits.* It is possible for
Economic Profits
a single firm to make economic profits while the industry cannot. *** IF MR and MC
come together above the average total cost curve, pure economic profits are
maximized.
Marginal revenues are at highest point, marginal costs at lowest point. All firms seek to
Profit Maximization --(MR=MC) maximize profits. A profit maximizing firm will choose the technology that minimizes
cost. In a competitive market, all firms seek to maximize profits.
break even occurs at the long run, second breakeven; accounting profits occur both at
Revenue Maximization (TR>TC)
the short-run and the long run breakeven.
Elasticity of Demand Responsiveness of demand to a change in a product price
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Marginal Revenue Increase in Total Revenues from adding one more unit of a product
Implies that as one unit of input is added, output increases by more than one unit.
Economies of scale Increased production leads to a lower average costs per unit. *are a result of increased
specialization.
A monopoly that can take advantage of decreasing average costs. Where a single firm
Natural Monopoly
can produce all of the industrys output at a lower per-unit cost than other firms.
Demand curve is the market curve. Monopolies do not always earn a profit.
Monopoly Demand Curve and Profits
Monopolies seek to maximize profits, not meet the full demand of consumers.
Price Taker Firms in a perfectly competitive market
Each firm holds a relatively small market share. In a monopolistic competition there
Monopolistic competition tends to be zero economic profits. They are price takers. **A market where there are a
large number of firms that produce similar but not identical products.
An analysis used to explain why price changes are infrequent in an oligopoly.** In
Kinked Demand cURVE
kinked demand theory, price tends to be inflexible.
A cartel is an association of producers who agree to set common prices and restrict
Cartel/Collusion output. **Collusion among oligopolist is difficult because of demand and cost
differences.
Producut differentiation Distinguising a product by name quality, brand, color, services or attributes.
Price Discrimination Selling a product at more than one price where cos is not a consideration
Minimum price fixed by a firm or the government. *Leads to a surplus. IS ABOVE THE
Price Floor
MARKET PRICE. *An example is farm subsidies.
Implicit costs are payments made to the owners of the firm.
Explicit Costs are payments made to the non-owners of the firm.
A decrease in the cost of the inputs (factors) leads to lower per unit production costs. A
Production Costs
shift in consumer tastes and preferences will cause total production to change.
Average total cost Total fixed cost divided by quantity produced.
Corporate profits after taxes are divided into two categories, dividens and retained
Retained earnings
earnings. Retained earnings are used for internal financing.
A decrease in the value of the dollar relative to another currency, so a dollar buys a
Depreciation smaller amount of the foreign currency and therefore of foreign goods; is also called
the consumption of fixed capital.
Opportunity Cost The Value of the good, service, or time forgone to obtain something else.
Exchange Rate The rate of exchange of one nation's currency for another nation's currency.
A situation in which a person or country can produce a specific product at a lower
Comparative Advantage opportunity cost than some other person or country; the basis for specialization and
trade.
(1) a relatively large number of seller (small market shares, no collusion, Independent
Monopolistic Characteristics action), (2) differentiated products (often promoted by heavy advertising), and (3) easy
entry to, and exit from, the industry.
Profit-Maximizing Level of Output for by producing the output at which MR=MC (marginal revenue equals marginal cost).
Monopoly
few large producers of a homogenous (standard products) or differentiated product,
Characteristics of Oligopoly
control over their prices, but mutual interdependent.
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