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Chap 15 Econ

QuestionAnswer
Competitive Market: Market with many buyers and sellers trading identical products so each buyer and seller is a price taker
Average revenue: Total revenue/quantity sold
Marginal revenue: Change in total revenue from an additional unit sold
All Firms: Average revenue = Price of good
For Competitive Firms: Total Revenue = P x Q (P is fixed), When Q rises by 1, total revenue rises by P dollars, Marginal Revenue = Price of the good
Goal of a firm- Maximize profit: TR − TC (TR = P × Q and TC = FC + VC)
Find Q: compare marginal revenue and marginal cost of each unit produced
MR > MC: the firm should increase its output
MC > MR: the firm should decrease its output
MR = MC: At the profit-maximizing level of output
Marginal-cost curve: Determines the quantity of the good the firm is willing to supply at any price, is also the supply curve
marginal-cost curve and the firm’s supply decision: MC curve is upward sloping, ATC curve is U-shaped, MC curve crosses the ATC curve at the minimum of ATC curve, P = AR = MR
An increase in the price from P1 to P2: leads to an increase in the firm’s profit-maximizing quantity from Q1 to Q2
Shutdown: Short-run decision not to produce anything during a specific period of time because of current market conditions, Firm has to pay fixed costs
Exit: Long-run decision to leave the market, Firm has zero costs
Cost of shutting down: Revenue loss = TR
Benefit of shutting down: Cost savings = VC
The firm’s short-run decision: Shut down if TR < VC (or P < AVC)
Short-run supply curve: portion of its marginal-cost curve that is above the average variable cost
Sunk Cost: Cost that is unable to be recovered, Should be ignored in decision making, In the short run, fixed costs = sunk costs
Cost of exiting market: Revenue loss = TR
Benefit of exiting market: Cost savings = TC
The firm’s long-run decision: Exit if TR < TC (or P < ATC), Enter if TR > TC (or P > ATC)
Long-run supply curve: portion of its marginal-cost curve that is above the average-total-cost curve, Costs rise as firms enter the market, Firms have different costs
Maximizing profit: If P > ATC, Profit = TR − TC = (P − ATC) × Q
Minimizing losses: If P < ATC, Loss = TC − TR = (ATC − P) × Q
Profit-Maximizing Rules for a Competitive Firm: Q when P = MC; P < AVC, shut down, remain out of business; AVC < P < ATC, operate in short run, exit in the long run; ATC < P, stay in business
Assumptions: All existing/potential firms have identical cost curves, each firm's costs don’t change as other firms enter or exit
Number of firms: Fixed in short run (due to fixed costs), Variable in long run (due to free entry/exit)
P > AVC (Short Run Market Supply Curve): Each firm will produce its profit-maximizing quantity, where MR = MC, Supply curve is MC curve
The Long Run: Market Supply with Entry and Exit: If P > ATC, firms make positive profit, New firms enter the market; If P < ATC, firms make negative profit, Firms exit the market
End of Entry/Exit Process: Firms still in market make zero economic profit, When price and average total cost are driven to equality, In the long run- P = min ATC
Zero-profit equilibrium: Economic profit is zero, Accounting profit is positive
Long-run equilibrium: P = minimum ATC
Short run (Shift in demand): Higher quantity, Higher price: P > ATC, positive economic profit
Long run (Shift in demand): Firms enter the market, Short run supply curve shifts right, Price decreases back to minimum ATC, Quantity increases
Long run supply curve elasticity: typically more elastic than the short-run supply curve, because firms can enter and exit more easily in the long run than in the short run
Horizontal long-run supply curve: All firms have identical costs, costs do not change as other firms enter or exit the market
Upward long-run supply curve: Firms have different costs, costs rise as firms enter the market
Created by: IanMcCormick20
 

 



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