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A A E Chaps 10-11

Pure Competition in Long and Short Run

TermDefinition
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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