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Micro Chapter 10
| Term | Definition |
|---|---|
| Market Structure: | pure competition |
| Imperfect Competition: | -pure monopoly -monopolistic competition -oligopoly |
| Pure Competition Characteristics: | -Very large numbers of sellers -standardized product - "Price takers" (sellers that do not have the power to influence the market price of a good/service) -Free entry and exit |
| Avg Revenue (AR)= | TR/Q ; Revenue per unit is also equal to Price (AR = TR/Q = P) |
| Total Revenue (TR)= | PxQ |
| Marginal Revenue (MR)= | ΔTR/ΔQ extra revenue from 1 more unit |
| Profit Maximization (TR-TC Approach): | TR-TC -Break-even point -competitive producers want to produce at the output level where TR exceeds TC by the greatest amount |
| Profit Maximization (MR = MC Approach): | MR = MC (or as close as possible) the amount they are closest at For a price taker, price = marginal revenue |
| Profit Maximization (3 Q's that the firm considers): | 1. Should they produce? 2. If so, how much? 3. What will be the economic profit/loss? |
| Loss Minimizing Case: Should still produce when MR is __ than minimum AVC | loss minimization -Still produce because MR > minimum AVC -Losses are at a minimum where MR = MC -Producing adds more to revenue than to costs |
| Short-Run Supply curve: | as long as P > minimum AVC, the firm continues to produce using the rule: MR (=P) = MC |
| Firm Versus Industry | Fallacy of Composition: -what's true for one is not true for all Ex: if everyone starts selling more corn, prices/profits will fall |
| The Long Run in Pure Competition | In the long run: -firms can enter/exit the industry -variable plant size Decisions are based on the incentives of profits or losses |
| Assumptions: Easy entry and exit | The only long-run adjustment we consider in this analysis |
| Assumptions: Identical costs | All firms in the industry have identical costs |
| Assumptions: Constant-cost industry | Entry and exit of firms does not affect resource prices |
| Long-Run Equil: Entry eliminates profits | -firms enter -supply increases -price falls the more firms that are selling, the more the prices will drop |
| Long-Run Equil: Exit eliminates losses | -firms leave -supply decreases -price rises the less firms that are selling, the more the price will increase |
| When is efficiency achieved in pure competition | in the long run, efficiency is achieved |
| Productive efficiency: | producing where P = minimum ATC |
| Allocative efficiency: | producing where P = MC |
| Triple Equality: | P = MC = minimum ATC (when you get productive and allocative efficiency) |
| Dynamic Adjustments: | Purely competitive markets will automatically adjust to: -changes in consumer tastes -resource supplies -technology -recall "the invisible hand" |
| Creative Destruction | Creation of new products and methods may destroy old products and methods. Result of competition and innovation |
Created by:
Phillies55
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