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The main concept demonstrated in the production possibilities frontier is Opportunity cost When country A has a lower opportunity cost of producing sugar relative to country B, then country A is said to have Comparative Advantage A graph that shows the combinations of two goods that the economy can produce given the available scarce resources and available technology is called a Production Possibilities Frontier Assume a production possibilities frontier for pickup trucks and big Mac hamburgers. The economy is producing 20 big Mac hamburgers and 65 pickup trucks (point 20, 65). What is the opportunity cost of producing an additional 20 Big Mac hamburgers (point 40, 60)? Five Pickup Trucks The opportunity cost of an item is whatever must be given up to obtain the item.
Consider market for pork, suppose that price of beef, a substitute for pork, increases. Because of the change in price of beef, the equilibrium price of pork...? Increases Consider the market for pork, suppose that the price of beef, a substitute for pork, increases. Because of this change in the price of beef, the equilibrium quantity of pork will...? Increase because increase in price of beef causes demand curve for pork to shift North East. B/c of this shift, the equilibrium quantity of pork will increase. Consider the market for pork. Suppose that the price of hog feed, an input to the production of pork, increases. Because of that change in the price of hog feed, the equilibrium quantity of pork ...? Decreases because the increase in price of hog feed causes the supply curve for pork to shift NW. B/c of this shift, the quantity of pork decreases. Consider the market for pork. Suppose that disposable income increases and pork is an inferior good. Because of that change in income, the equilibrium price of pork...? Decreases because the increase in disposable income causes the demand curve for pork to shift south west, because pork is an inferior good. because of this shift, the equilibrium price of pork decreases.
True or False: the law of demand states that if the price of a good increases, CP, then the quantity demanded of that good will increase. False. quantity demanded of that good will decrease. Suppose the cross-price elasticity of demand for home heating oil with respect to the price of natural gas is +0.6. This number tells us that home heating oil and natural gas are substitute or compliment goods? Substitute goods. When the cross price elasticity is positive then they are substitutes. Consider the market for mustard which is a complement to hot dogs. Suppose the price of hot dogs increase. What happens to the equilibrium price and equilibrium quantity of the mustard market? Equilibrium price decreases and equilibrium quantity decreases. The price of hot dogs is an independent variable in the demand function for mustard. This is because hot dogs and mustard are complementary goods. Therefore, if the price of hot dogs increases, then the demand curve for mustard shifts to the south- west. People demand less mustard at every price when hot dogs are more expensive. In the mustard market, the equilibrium price decreases and equilibrium quantity decreases. profit maximizing rule
a business maximizes profits when it produces where the marginal revenue from selling another unit equals the marginal cost of producing another unit. Marginal Revenue=Marginal Cost Marginal cost is equal to the change in the total cost that arises from an extra unit of production. It is calculated by taking the change in total cost and dividing it by the change in the quantity produced =change in TC/change in Q Marginal revenue is the change in total revenue generated from an additional unit sold. It is calculated by taking the change in total revenue divided by the change in quantity sold Short Run a time horizon where some fixed costs exist. is a time horizon within which a business is unable to adjust at least one input because there is a fixed cost of some kind. we think in terms of the short run not the long run Long Run a situation where the fixed costs (the inputs) become variable. a time horizon long enough for the seller to adjust all inputs. If you observe a business with no fixed costs, then it is in a long
a cost that has already been committed and cannot be recovered joint costs costs that do not change with changes in the scope of production. economies of scope arise when there are joint costs. (ie: comcast purchasing NBC universal). perfect competition occurs in an industry in which
- there are many buyers and many sellers
- an industry in which the good is homogeneous
- and an industry in which all who want to enter the industry are free to do so and any business may exit at a time of their choosing monopoly an industry that is controlled by a monopolist firm who is the only seller of a good. the good the monopolist sells is heterogeneous because they are the only one that sells the good and the market that the monopolist sells its product in has barriers to entry short run shut-down rule a business could shut down if production at the profit maximizing quantity (where MR=MC) generates total revenues that are less than variable costs. In all other cases the business should stay open
a business should shut down when the losses from operating are greater than the total fixed costs. Economies of scale occur over a range of production in which average total costs decline as output increases (ie: creation of software, a pharmaceutical pill) they have large fixed costs and relatively low marginal costs. diseconomies of scale occur over a range of output in which average total costs increase as output increases constant economies of scale occur over a range of production where constant average total cost as output increases economies of scope occur when an organization can produce several products together at less cost than could a group of single product firms operating independently whenever marginal cost is higher than average variable cost or average total cost, the average variable cost or average total cost must increase
calculated by multiplying price and quantity or Marginal Revenue and quantity market price change in total revenue resulting from a on-unit increase in the quantity sold equals the market price. in the pursuit of maximizing profits, business owners are constrained in two fundamental ways:
- the competency of its employees and the market prices of inputs into the production process dictate the costs of producing output
- the price that a perfectly competitive business can charge is determined by the market, and not the business owner long run decision states that a business should exit the industry if production at the profit maximizing quantity where (MR=MC) generates total revenues that are less than total cost. Otherwise they stay open. three characteristics of a monopolistic industry include:
- there are many buyers and only one seller
- the good is heterogeneous, and
- barriers to entering the market exist (ie: patents are barriers that make it illegal for someone to produce a product without permission from the patent owner) price setter
in a monopolistic industry, because there is only one seller of a product the business owner actually goes through a process of setting the price of its product, a task that competitive firms are unable to do. Thus monopolistic firms are called price setters. constraints of a monopoly
- ....?
- the market demand three decisions faced by a monopoly
- determine the profit maximizing quantity to produce
- decide what price to charge
- because this is the short run, decide whether to produce or shut down the business for a short period of time. profit maximizing quantity marginal revenue equals marginal cost Marginal cost is the increase in total cost that arises from an extra unit of production (T/F) True. A production process has economies of scale if average total cost decreases as production increases (true or false) True We have an expert-written solution to this problem!
A business should shut down if production at the profit maximizing quantity generates total revenues that are less than total fixed costs. (t/f) false. a business should shut down when the losses from operating are greater than the total fixed costs. short run shutdown rule. a business should shut down if production at the profit maximizing quantity The accountants hired by Costa law firm have calculated that at the profit maximizing quantity, total fixed costs equal $56,791, total variable costs equal $113,555 and total revenue equals $112,000. Because of this info, Costa Law firm decides: A) to exit the industry B) to shut down C) decides to stay open because shutting down would be more expensive D) decides to stay open because they are making an economic profit B. to shut down. the shutdown rule states that a business should shut down in the short run only if total revenue is less than total variable costs. In this case, total revenue is $112,000 and total variable cost is $113,555. Because total variable cost exceeds total revenue, CLF should shut down.
How can you tell if a business is operating in a perfectly competitive market? the marginal revenue from selling an additional unit does not change as output increases. They are also known as a price taker. You will notice the Marginal revenue column stays constant as output increases. What is the per unit price in a perfectly competitive market? The market equilibrium price is equal to marginal revenue total cost equals total revenue minus profit if marginal revenues and marginal costs do not equal in a chart choose the closest option to determine marginal cost (t/f) true In the WSJ article it was reported that Mitsubishi is seeking a buyer for its U.S> operations, a move that may well signal the company's intent to exit the world's largest car market. The potential move by Mitsubishi is a matter of economies of scale or economies of scope? Economies of scale. it is trying to sell its U.S> operations because they have been losing money for some time in the U.S. market. By contracting its scale of operation, Mitsubishi believes that it can turn its financial situation around.
electricity distribution. If two activities in the production of a good are integrated under unified ownership and there is a cost DISadvantage, then diseconomies of scope exist. By purchasing electricity generation from the market, then it must be less costly. Otherwise, we would observe unified ownership of the distribution network and the generation of electricity. The profit maximizing rule states that a business maximizes profits when it produces where total revenue equals total cost (t/f) False. The accountants hired BBB law firm have calculated that at the profit maximizing quantity total fixed costs equal $56,272, total variable costs equal $213,235,000 and total revenue equals $213,236,000. Because of this information BBB law firm decides A. to exit the industry B. to shut down C. decides to stay open because shutting down would be more expensive D. decides to stay open because they are making an economic profit C. decides to stay open because shutting down would be more expensive. Because total variable cost is less than total revenue, BBB Law Firm should stay open.
The accountants hired by Truscott and Associates have calculated that at the company's current production level, total fixed costs to equal $21,000, total variable costs to equal $42,000 and total revenue to equal $45,000. Because of this information Truscott & Associates decide A) to exit the industry B) to shut down C) to stay open because shutting down would be more expensive D) to stay open because they are making an economic profit C. to stay open because shutting down would be more expensive The profit maximizing rule states that a business maximizes profits when it produces where marginal revenue equals average variable cost. T/F False Real Gross Domestic Product (GDP) a measure of the market value of the production of the final goods and services after an adjustment has been made for changes in the price level = Nominal GDP / Price level index * 100 The National Income Identity the accounting concept which states that, in a time period, aggregate expenditure on wages, interest, rents, and profits is equal to nominal GDP is equal to consumption spending, investment spending, government spending, and net exports.
offers a set of tools and concepts that both economists and policy makers use to try to figure out the overall pulse of the economy The term "gross" in GDP means that the data are not adjusted for depreciation- a term that represents the reduction in market value of economic capital as it slowly wears out and approaches the end of its useful life. Net domestic product the calculation of GDP which adjusts for depreciation Product in GDP equals the market value of final goods and services produced over the course of a year in the domestic economy nominal GDP equals the market value of final goods and services produced at current year prices. -almost always useless at telling us the true value of final goods and services because it confuses changes in the inflation or deflation with changes in total production. = C + I + G + NX -economies reject nominal GDP and use real GDP per capita
means that total GDP is divided by the U.S. population. This is done to control for changes, positive or negative, in the U.S. population Intermediate goods and services used in the production of final goods and services. not included in GDP. ie: Starbucks purchasing coffee beans is an intermediate good. business cycles irregular changes in the level of total output measured by real GDP economic contraction the negative movement from peak to trough in a business cycle because real GDP is smaller than the previous period recession if a contraction moves below the trend line for two or more quarters of a year then it is called a recession economic expansion (or recovery) the positive movement from trough to peak because real GDP is larger than the previous period who measures GDP in the U.S.? the U.S. Department of Commerce's Bureau of Economic Analysis (BEA)
