Econ – Perfect Competition – Flashcards
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Describe "free entry and exit" as one of the characteristics of a perfectly competitive market.
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-no obstacles that would stop firms from forming or dissolving in the industry
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What does Mr. Darp stand for in PC?
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-Marginal revenue, demand, average revenue, price
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What does Mr. Darp look like and why?
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-horizontal line -demand for a firm in PC is perfectly elastic
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How does a change in one of the determinants of demand or supply in the market impact Mr. Darp?
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-it changes price and Mr. Darp moves up or down accordingly
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What are the profit maximization questions?
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-Should the firm produce? - if firm can make more $ by producing than $ it loses by not producing, yes - How much should the firm produce? - should produce where profit is maximized/where distance between TR and TC is greatest.
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Where is profit maximized with regard to MR and MC?
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- MR = MC, provided MC is increasing and P is greater than AVC
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What has to happen for a firm to be making economic profit?
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- Mr. Darp must be above ATC
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What has to happen for a firm to be making normal profit?
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- Mr. Darp = ATC
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What has to happen for a firm to be operating at a loss?
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- Mr. Darp must be below ATC
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Under what circumstances will a firm stay operating in the short run despite operating at a loss? Why?
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- If Mr. Darp is above AVC, firm will stay open -in SR, sunk costs do not get factored into decision to stay open -- can be recovered over long run
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At what point is a firm indifferent to shutting down?
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- Mr. Darp = AVC -this is the "shut down point"
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At what point does a firm have to shut down?
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- When Mr. Darp falls below AVC
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What is the short run supply curve for a firm under PC?
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-MC above AVC
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What is the long run supply curve for a firm under PC?
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-MC above ATC
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What is the demand curve for a firm under PC?
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-Mr. Darp
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What is the market demand curve shaped like?
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-downward sloping
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What is the long run market supply curve?
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-perfectly elastic
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What causes firms to enter a market in the long run? to exit?
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-enter if P is greater than ATC -exit if P is less than ATC
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What happens to market supply and demand when firms enter?
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-market supply increases, price goes down and QD increases
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What happens to market supply and demand when firms exit?
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-market supply decrease, price goes up and QD decreases
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What type of profit is a firm making in the long run under PC?
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-normal profit
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What happens if a firm is making economic profit or operating at a loss?
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more firms enter/exit, cause firm to return to breakeven point (normal profit)
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constant cost industry
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-industry expansion or contraction does not change input prices (long run ATC curve does not shift) -long run market SC is perfectly elastic
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increasing cost industry
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industry expansion increase factor prices which shifts ATC upward and increases Peq -long run market supply is upward sloping
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decreasing cost industry
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industry expansion decreases factor prices, ATC shifts downward and Peq decreases -long run market supply is downward sloping
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business cycle
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Fluctuations in economic activity, such as employment and production
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expansionary phase
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-uphill of cycle -output increases and unemployment decreases -inflation may occur
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peak
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-top of cycle -real output (GDP) is at highest point
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contractionary phase
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-real output decreases -unemployment increases -inflation decreases -leads to recession
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trough
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-bottom of cycle -lowest point of real GDP -can be called a depression
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What factors do we look at in order to tell which phase of the business cycle we are currently in?
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unemployment, inflation, GDP
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T/F: We see the business cycle moving up at an angle over time because of economic growth
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T
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What are the three goals for the economy?
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1. full employment - measured by unemployment rate 2. price stability - measured by CPI 3. economic growth - measured using GDP
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gross domestic product (GDP)
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the market value of all final goods and services produced within a country in a given period of time
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What is counted in calculating GDP?
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-consumption, investment, government spending, net exports
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Consumption
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spending by households on G/S
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Investment
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-spending on capital equipment, inventories, and structures -new houses also fit into this category
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Government spending
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-spending on G/S by local, state, or federal government
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Net exports
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-Exports minus imports -spending on domestically produced goods by foreigners (EX) minus spending on foreign goods by domestic residents (IM)
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What is not counted when calculating GDP?
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-intermediate goods -resold items -things not produced within the country -illegal goods -goods produced/consumed at home (your own vegetable garden)
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unemployment
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Measures the number of people who are able and willing to work, but do not have a job during a period of time.
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labor force
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employed + unemployed
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labor force participation rate
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(labor force/ population 16+) x 100
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How can the unemployment rate be overstated?
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-people who do not have a job but are searching and are confident they will find one soon, just haven't found one yet
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How can the unemployment rate be understated?
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discounts: -discouraged workers -marginally attached workers - wanted to work and have looked but didn't find anything -underemployed
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frictional unemployment
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-unemployment due to the time workers spend in job search -always there because jobs are constantly created/destroyed and new workers are always entering the workforce
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structural unemployment
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-more people seeking jobs in a given labor market than are available at the current wage rate] -surplus of workers -wage rate is above equilibrium
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cyclical unemployment
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Deviations from the natural rate of unemployment based on normal fluctuations in the business cycle.
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natural unemployment
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-the unemployment rate when the economy is at full employment -frictional unemployment + structural unemployment
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actual unemployment
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natural unemployment + cyclical unemployment
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