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Chapter 12

Micro- Perfect Competition and the Supply Curve

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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