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Micro Exam 3
| Term | Definition |
|---|---|
| Perfectly Competitive Market | Many buyers and many sellers who are trading identical products so that each buyer and seller is a price taker. Firms can enter and exit freely. |
| Price Taker | the idea that an individual doesn't hold enough power to change market price because of how large the market is |
| Examples of Perfectly Competitive Market | milk market, agricultural markets |
| Goal of Perfectly Competitive Market | maximize profit |
| Economic Profit = | Total revenue - Economic costs |
| Economic costs includes | explicit and implicit costs |
| Profit Maximization Rule in a Perfectly Competitive Market | picking a level of output where marginal revenue equals marginal costs |
| Marginal Principle is applied in the | profit maximization rule |
| Marginal Revenue | change in total revenue from selling one more input |
| Only in the Perfectly Competitive Market Marginal Revenue = | Price |
| Only in the Perfectly Competitive Market, you should choose the price that equals | marginal costs, helps to determine output level |
| Profit = | (price-avg costs)quantity |
| When should a firm shut down in a perfectly competitive market? | firm should stay open in short run if total revenue exceeds variable costs |
| Why should a firm stay open if total revenue is more than variable costs? | because the firms is able to cover all variable costs and some fixed costs |
| Shut down decision rule in a perfectly competitive market | the firm should shut down if price is below minimum average variable costs |
| Profit maximization point is where | marginal revenue equals marginal costs |
| The intersection of marginal costs and marginal revenue can be used to find | output level |
| to compute loss or profit in a perfectly competitive market | determine the marginal revenue price, average total costs and output level at that price |
| whenever market price is below | average total costs it is a loss |
| average total costs is vital in determining | loss and profit |
| when deciding whether or not to stay open in perfectly competitive market look at | short run average variable costs |
| if a firm in perfectly competitive market shuts down in short run | it gives them time to change their variable costs and only focus on fixed costs |
| shut down price in a perfectly competitive market | price = minimum average variable costs, meaning it is indifferent |
| Long Run Equilibrium | firms can freely enter and exit the market, only here though |
| If firms are making profit in the long run market | more firms will enter |
| If firms are losing profit in the long run market | firms will leave and they'll be reluctant to enter |
| There can not be positive or negative profit in long run so firms make | zero dollar economic profit |
| zero dollar economic profit takes into account | compensation for the owner |
| Long run market supply curve | represents a long run equilibrium where firm makes $0 profit |
| Positively sloped long run market supply curve | increasing cost industry |
| increasing cost industry | implying average costs of production increases as output increases |
| Horizontal long run market supply curve | constant cost industry |
| constant cost industry | implies average cost of production is constant despite increase in output, meaning the supplies is plentiful |
| when in long run market equilibrium the economic profit is | zero dollars |
| when the demand curve shifts in a perfectly competitive market it intersects the | short run supply curve to make a new short run equilibrium |
| if price equal average costs | then economic profit is zero dollars |
| profit maximization rule | price equals marginal costs |
| in the long run, when firms make a positive profit more firms will join the market resulting in an | increase in an increase in supply |
| in the long run market supply with a increasing cost industry, the long run market supply curve will be | flatter than short run supply |
| in a increasing cost industry the long run market supply curve is flatter because of | elasticity of supply, its determinant is time |
| industry expansion leading to more costs is | increasing costs industry |
| plentiful supplies | constant cost industry |
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