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Chapter 12
Micro- Perfect Competition and the Supply Curve
| Term | Definition |
|---|---|
| Key Characteristics of Perfect Competition | 1. Many buyers and sellers 2. The product is standardized across sellers (standardized product aka commodity) 3. Free entry and exit |
| Market Share | fraction of the total industry output accounted for by that producer's output/both sellers and buyers are price-takers (their actions have no effect on price) |
| Standardized Product | "commodity": Consumers regard different sellers' products as equivalent |
| Free entry and exit | New producers can easily enter into an industry and existing producers can easily leave that industry |
| Total Revenue | TR=PxQ (price x quantity sold) |
| Profit | Profit=TR-TC (total revenue-total cost) |
| Marginal Revenue | change in total revenue generated by an additional unit of output MR=change in TR/change in quantity |
| Optimal output rule | Profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost |
| Why is profit maximized where MR=MC? | Each time the firm produces another unit, there are extra costs and extra revenues |
| If MR> MC producing less will | add to profit |
| If MR<MC producing less will | add to profit |
| Since MR=P for competitive firms the profit maximizing rule is.... | Choose the quantity of output where P=MC |
| If TR>TC, the firm is | profitable |
| If TR=TC, the firm | breaks even |
| If TR<TC, the firm | incurs a loss |
| Calculating Profit | Profit= TR-TC=(TR/Q - TC/Q) x Q or Profit = (P-ATC) x Q |
| Break-even price | (of a price-taking firm) is the market price at which it earns zero profit |
| If a firm is earning positive economic profit, it must be the case that: | price is greater than average cost |
| Shut-down price | minimum average variable cost |
| Firms will choose to produce (even at a loss) IF | they can cover their variable and some of their fixed costs |
| If a competitive firm produces where the marginal cost curve intersects with average total cost curve at its minimum point, the firm will earn: | zero economic profits |
| Should a competitive firm keep producing even if it faces short-run losses (and is producing at a point on its MC curve that is above the minimum AVC)? | Yes, because it covers its variable costs and some fixed costs |
| In the short run, a firm will produce IF | P>shutdown price (min AVC) |
| A firm will NOT produce IF | P<min AVC |
| If P> break-even (min ATC), firms are | profitable |
| on a Short-Run Industry Supply Curve a higher price means..... | more firms are willing to supply |
| A market is in long-run equilibrium when the quantity supplied equals ... | the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur |
| The LRS shows how | the quantity supplied responds to the price (once producers have had time to enter or exit the industry) |
| Long-run supply curve(LRS) | always flatter-more elastic-than the short-run industry supply curve |
| The LRS curve is more elastic BC of entry and exit: | -a higher price attracts new entrants in the long run, raising industry output and lowering price -a fall in price induces existing producers to exit in the long run, reducing industry output and raising price |
| If the market price is above the break-even level (no matter how slightly) ... | the firm can earn more in this industry than it could elsewhere |
| The long-run market equilibrium in perfectly competitive industry with identical firms results in all firms: | -earning zero economic profit -producing the quantity associated with their break-even price -producing the profit-maximizing quantity at which MR=MC |
Created by:
kthomas96
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