•A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit
What is perfect competition?
A market structure characterized by:
1. Large number of small firms2. Homogeneous product3. Very easy entry and exit
What is meant by a large numberof firms?
•A large number of sellers condition is met when each firm is so small relative to the total market that no single firm can influence the market price
What doeshomogeneous mean?
•Goods that cannot be distinguished from one another. For example, farmer Brown’s wheat is identical to farmer Jones’s wheat.
What conclusion can we makeconcerning a homogeneous product?
•If a product is homogeneous, buyers are indifferent as to which seller’s product they buy
What does very easy entry mean?
•Perfect competition requires that a new firm faces no barriers to entry, such as financial, technical, or government-imposed barriers (licenses, permits, patents).
What is the result of a firm conforming to the perfect competition model?
•The firm is a price taker, which means it is a seller that has no control over the price of the product.
What determines price in perfect competition?
•Market Demand and Market Supply
What determines the individualfirm’s demand curve?
•A horizontal line at the market price
Why is this horizontal line thefirm’s demand curve?
•If the firm charges more than this price, it will not sell anything, and it has no incentive to charge less than this price
Why is the firm’s demand curvehorizontal at the market price?
•Because the firm can sell all it produces at the market price
Why does the firm have noincentive to charge less than the market price?
•It can sell everything it brings to market at the market price
Why does the firm have noincentive to charge less than the market price?
•It can sell everything it brings to market at the market price
What does the perfectlycompetitive firm control?
•As a price taker, the only thing the firm controls is how many units it produces
How many units should this firmproduce?
•The number of units that will maximize its profits, or minimize its losses
What are the two methods todetermine how many units to produce?
•TR and TC method •MR and MC method
Using the total revenue-totalcost method, where should a firm produce?
•Where the distance between TR and TC is the greatest
What ismarginal revenue (MR)?
The change in total revenue from the sale of one additional unit of output.
MR= change in TR/ change 1 output
What is marginal cost (MC)?
•The change in total cost from the sale of one unit of output.
MC= change in TC/ change 1 output
Using the marginal revenue andmarginal cost method, where should a firm produce?
MR = MC
Why should a firm continue to produce as long as MR > MC?
•As long as MR is greater than MC, profit is being made on that last unit produced and sold.
Why will a firm not produce anyunit where MR < MC?
•At any unit of output where MR < MC, the firm incurs a loss.
What happens if Price (MR) is below minimum average variable cost?
Firm will shut down
What is the perfectly competitivefirm’s short-run supply curve?
•The firm’s marginal cost curve above the minimum point on its average variable cost curve
What is the perfectly competitiveindustry’s supply curve?
•The horizontal summation of the MC curves of all firms in the industry above that lie above the minimum point on their AVC curves.
What is a normal profit?
•The minimum profit necessary to keep a firm in operation
In the long-run, what happenswhen economic profits are made?
•When firms make more than a normal profit, firms enter the industry; as supply increases, a downward pressure is put on prices
In the long-run, what happenswhen losses are made?
•When firms make less than a normal profit, firms leave the industry; as supply decreases, an upward pressure is put on prices
In the long-run, where isequilibrium?
•At the market price that enables firms to make a normal profit
What equality exists at long-run perfectly competitive equilibrium?
P=MR=SRMC=SRATC=LRAC
What different types ofindustries can exist in the long-run?
•Constant-cost •Decreasing-cost•Increasing-cost
What is aconstant-cost industry?
•An industry in which the expansion of industry output by the entry of new firms has no effect on the firm’s cost curves
What does the long-run supplycurve look like in a constant-cost industry?
•It is perfectly elastic, which is horizontal
Increase in demand sets a higher equilibrium price=>Entry of new firmsincreases supply=>Initial equilibriumprice is restored=>
...leads to what
a Perfectly elastic long-run supply curve
What is a decreasing-costindustry?
•An industry in which the expansion of industry output by the entry of new firms decreases the firm’s cost curves
What does the long-run supplycurve look like in a decreasing-cost industry?
•It is downward sloping
What is an increasing-costindustry?
•An industry in which the expansion of industry output by the entry of new firms increases the firm’s cost curves
What does the long-run supplycurve look like in a increasing-cost industry?
•It is upward sloping
increase in demand sets a higher equilbrium price--> entry of new firms increases supply--> Equilbrium price and ATC decrease--> downward a sloping long-run supply curve
True or False
True
The monpolist faces a
the entire market demand curve
to maximize its profit a monopoly shoud choose a price where demand is
ELASTIC
when marginal revenue is zero for monoplist facing downward sloping straight line demand cruve price elasticity of demand is
equal to 1
both a perfectly competitive firm and a monopolist
maximize profit by setting marginal cost equal to mr MC=MR
Suppose a monopolist demand curve lies below its average variable cost curve the firm will
earn an economic profit in theh long run
Although a monoply can charge any price it wishes it chooses
