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A A E Chaps 10-11
Pure Competition in Long and Short Run
| Term | Definition |
|---|---|
| Profit Maximization in SR | Producing at output where MR = MC |
| SR Supply Curve | Portion of firm's MC curve that lies above min AVC curve |
| Market SR Supply Curve | Horizontal sum of all individual firm's supply curves |
| Shutdown Point | Output level where P= min AVC Firms will shutdown if they can't cover their VC |
| Breakeven Point | Output level where P = ATC Firms will continue to produce at this output level in SR, but will earn zero economic profit |
| Economic Profit in SR | If P exceeds ATC |
| Firm will Incur SR Loss if... | P is less than ATC, but will continue to produce as long as P is greater than AVC |
| Price Takers | Seller/buyer that is unable to affect the price at which a product/resource sells by changing the amount it sells (or buys) |
| SR Pure Competition | Very large number of sellers Standardized products No significant barriers to enter/exit Price takers |
| Purely Competitive Demand | Individual firm is perfectly elastic Demand graph is horizontal line |
| TR-TC Approach to Profit Maximization | Firm must decide to produce or shutdown TR - TC = profit or loss |
| MR- MC Approach | Firms should continue to expand output as long as MR is greater than MC and until MR = MC |
| Loss Minimizing Case (SR) | If P is lower than min ATC and P is high enough to cover AVC, then firm will produce and minimize loss |
| Shutdown Case (SR) | If P is lower than min ATC and P can't cover AVC, firm should shutdown |
| SR MC Curve | MC Curve becomes SR supply curve between shutdown point and break even point |
| Entry and Exit of Firms in LR | Firms can enter and exit the market, resulting in changes in number of firms and shifts in supply curve |
| LR Adjustment Process | Firms can adjust their plant size, enter or exit industry, make other changes to achieve efficiency and maximize profit |
| If Firms are Earning Profits in SR... | Firms will enter market, increase supply, and drive profits down until profits are eliminated |
| If firms are Experiencing Losses in SR... | Firms will exit the market, reducing supply and driving up prices until losses are eliminated |
| Constant Cost Industry | Entry or exit of firms doesn't affect the prices of resources, such as labor or raw materials |
| Increasing Cost Industry | One in which the entry of new firms into the industry leads to higher resource prices and increased production costs, leading to higher equilibrium prices and lower quantities |
| Decreasing Cost Industry | Entry of new firms into the industry leads to lower resource prices and decreased production costs, resulting in lower equilibrium prices and higher quantities |
| LR Profit Maximizing Conditions | Firms aim to max profits and produce where MC = MR, which occurs at point where MC intersects MR curve (profit maximizing output level). At this output level, P = min. ATC, ensuring firm is covering all of its costs, VC and FC |
| Profit Maximizing Output Level | Point where MC intersects MR curve |
| Triple Equality | P = MC = min. ATC Ensures allocative efficiency (P = MC) and productive efficiency (P = min ATC) |
| Productive Efficiency | In LR, firms in competitive market produce at min ATC |
| Allocative Efficiency | In competitive market, resources are allocated efficiently as P = MC |
| Creative Destruction | Process by which new innovations and technologies destroy existing products, firms, and industries while creating new opportunities for economic growth and progress |
| Dynamic Adjustments | Purely competitive markets will auto adjust to changes in consumer tastes (D), resource supplies, and technologies Invisible hand principle |
Created by:
Eliana.s
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