DETAILED
Consumer Surplus (CS) - ANSWER - (Maximum Buying Price)-(Price Paid)
- Difference between the max price a buyer is willing to pay for a good or service and they
price paid
Producer Surplus (PS) - ANSWER - (Price Received)-(Minimum Selling Price)
- Difference between price received for a good or service and the minimum selling price
Price Ceiling - ANSWER When governments place a limit on how high a producer may
charge for his product
Price Floor - ANSWER A legal minimum on the price at which a good can be sold
Fixed Costs (FC) - ANSWER Costs that do not vary with output
Variable Costs (VC) - ANSWER Costs that vary with output
Total Cost (TC) - ANSWER - The sum of fixed costs and variable costs
- TC = TFV + TVC
Marginal Cost (MC) - ANSWER The change in total cost that results from a change in
output
1
, Average Fixed Cost Curve - ANSWER Decrease due to spending
Average Variable Cost Curve - ANSWER Decrease due to gains from specialization, then
increase due to diminishing marginal returns
Average Total Cost Curve - ANSWER - U-shaped in the short run (reflects decreasing
costs due to spreading versus increasing costs due to diminishing marginal returns)
- Flatten out in long run (fixed costs become variable in the long run)
Marginal Cost Curve - ANSWER Moves with Average Total Cost
- Decrease due to gains from specialization
- Increase due to diminishing marginal returns
If Marginal Cost is LESS than ATC - ANSWER ATC decreasing --> More gains from
specialization
If Marginal Cost is MORE than ATC - ANSWER ATC increasing --> More losses from
diminishing marginal return
Steps on how much to produce, price, and determine profitability - ANSWER 1. Find
the intersection of MR & MC to maximize profit
2. At Profit Maximum Output: Is price greater than, equal to, or less than ATC
3. If P < AVC, then shut down
Companies sell differentiated products... - ANSWER - To avoid competition on product,
location, and to provide unique services & price
2
Consumer Surplus (CS) - ANSWER - (Maximum Buying Price)-(Price Paid)
- Difference between the max price a buyer is willing to pay for a good or service and they
price paid
Producer Surplus (PS) - ANSWER - (Price Received)-(Minimum Selling Price)
- Difference between price received for a good or service and the minimum selling price
Price Ceiling - ANSWER When governments place a limit on how high a producer may
charge for his product
Price Floor - ANSWER A legal minimum on the price at which a good can be sold
Fixed Costs (FC) - ANSWER Costs that do not vary with output
Variable Costs (VC) - ANSWER Costs that vary with output
Total Cost (TC) - ANSWER - The sum of fixed costs and variable costs
- TC = TFV + TVC
Marginal Cost (MC) - ANSWER The change in total cost that results from a change in
output
1
, Average Fixed Cost Curve - ANSWER Decrease due to spending
Average Variable Cost Curve - ANSWER Decrease due to gains from specialization, then
increase due to diminishing marginal returns
Average Total Cost Curve - ANSWER - U-shaped in the short run (reflects decreasing
costs due to spreading versus increasing costs due to diminishing marginal returns)
- Flatten out in long run (fixed costs become variable in the long run)
Marginal Cost Curve - ANSWER Moves with Average Total Cost
- Decrease due to gains from specialization
- Increase due to diminishing marginal returns
If Marginal Cost is LESS than ATC - ANSWER ATC decreasing --> More gains from
specialization
If Marginal Cost is MORE than ATC - ANSWER ATC increasing --> More losses from
diminishing marginal return
Steps on how much to produce, price, and determine profitability - ANSWER 1. Find
the intersection of MR & MC to maximize profit
2. At Profit Maximum Output: Is price greater than, equal to, or less than ATC
3. If P < AVC, then shut down
Companies sell differentiated products... - ANSWER - To avoid competition on product,
location, and to provide unique services & price
2
