Scribd
Upload
58 views3 pages

ECON Ch. 7, 8, 9 Midterm Study Guide

Uploaded by

allenokopnik
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
58 views3 pages

ECON Ch. 7, 8, 9 Midterm Study Guide

Uploaded by

allenokopnik
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Microeconomics Midterm Study Guide: Chapters 7, 8, and 9

Chapter 7: Producers in the Short Run

 Definition of a Firm:
o An organization that produces goods or services for profit. Firms can be
structured as single proprietorships, partnerships, corporations, or state-owned
enterprises.
 Types of Firms:
o Multinational Enterprises (MNEs): Firms operating in multiple countries;
common among corporations.
 Financial Capital:
o Equity: Funds raised through ownership shares; dividends are paid to
shareholders.
o Debt: Loans and bonds used to finance business activities.
 Short-Run Production:
o At least one factor of production is fixed (e.g., factory space).
o Profit Maximization Condition: Firms maximize profit where marginal
revenue (MR) equals marginal cost (MC).
 Costs in the Short Run:
o Fixed Costs (FC): Costs that do not vary with output.
o Variable Costs (VC): Costs that change with the level of output.
o Total Cost (TC): Sum of fixed and variable costs.

Chapter 8: Producers in the Long Run

 Long Run Definition:


o A period during which all inputs are variable, allowing firms to adjust production
scale.
 Technical and Economic Efficiency:
o Technical Efficiency: Achieving the highest output with a given set of inputs.
o Economic Efficiency: Using the least-cost combination of inputs, ensuring cost
minimization.
 Cost Minimization:
o Isoquants and Isocosts: Tools used to identify optimal input combinations.
o Cost Minimization Condition: The firm chooses input combinations where the
marginal product per dollar spent is equalized for all inputs:
PL MPL =PK MPK.
 Profit Maximization in the Long Run:
o Firms select the scale of production that minimizes long-run average costs
(LRAC).
o Economies of Scale: Occur when increasing production lowers the average cost.
o Diseconomies of Scale: Occur when increasing production raises the average
cost.

Chapter 9: Competitive Markets

 Characteristics of Perfect Competition:


o Many Sellers and Buyers: No single firm can influence the market price.
o Homogeneous Products: Products sold by different firms are identical.
o Price Takers: Firms accept the market price determined by supply and demand.
o Perfect Information: Buyers and sellers have complete knowledge of prices and
products.
o Freedom of Entry and Exit: No significant barriers to entering or exiting the
market.
 Revenue in Perfect Competition:
o Total Revenue (TR): TR=P×Q, where P is the market price and Q is the quantity
sold.
o Average Revenue (AR): Equal to the price of the product, AR=QTR =P.
o Marginal Revenue (MR): The change in total revenue from selling one
additional unit.
 Profit Maximization:
o Firms maximize profit by producing where MR = MC.
 Long-Run Equilibrium:
o Firms earn zero economic profit due to free entry and exit, which drives prices to
the level of average total cost (ATC).
 Short-Run and Long-Run Dynamics:
o Short-run profits attract new entrants, which increases supply and decreases the
market price until only normal profit is left.
 Shutdown Point:
o A firm should cease operations if the market price falls below the average
variable cost (AVC), as continuing would result in losses greater than fixed
costs.

Key Definitions to Know:

 Marginal Cost (MC): The increase in the total cost of producing one more unit of
output.
 Average Total Cost (ATC): ATC=QTC, representing total cost per unit of output.
 Economic Profit: Total revenue minus total cost, including both explicit and implicit
costs.

Important Notes from the Lecture:

 Perfect Competition is Theoretical: Real-life markets rarely match the conditions of


perfect competition; the concept is used to understand extreme cases.
 Graph Analysis:
o Be prepared to analyze supply and cost curves and identify profit or loss
scenarios.
o Understand where the ATC, AVC, and MC curves intersect and what they
signify.
 Real-World Context:
o The professor highlighted that while perfect competition is rare, it serves as a
baseline for comparing other market structures.

Practice Questions to Prepare:

1. Cost Calculations: Given cost and output data, determine which production technique
minimizes cost.
2. Returns to Scale: Identify the output range for increasing, constant, or decreasing returns
to scale.
3. Revenue and Profit: Calculate TR, AR, and MR for given market scenarios.
4. Profit Conditions: Recognize profit, loss, and break-even points on graphs.
5. Market Structure Analysis: Differentiate between perfect competition and monopolistic
competition or monopoly characteristics.

You might also like