Ch 6 Perfectly Competitive Supply

A firm's total profit equals

(P − ATC) × Q.

The following four conditions are characteristic of markets that are perfectly competitive:

-All firms sell the same standardized product. -The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged -Productive resources are mobile -Buyers and sellers are well informed.

Perfectly Competitive Firm

-It faces a perfectly elastic demand curve. -It is unable to influence the price of the good it sells. -It sells only a small fraction of the total quantity exchanged in the market.

perfectly competitive market

-a market in which no individual supplier has significant influence on the market price of the product -firms are price takers.

Diminishing returns

Implies that it takes more of the variable input to produce each additional unit of output, which, in turn, implies that marginal cost is increasing.

Short-run shutdown condition:

P x Q < VC (for all levels of Q) or P< minimum value of AVC

If output can be varied continuously, then firms in a perfectly competitive market maximize their profits by choosing the level of output such that _____. P>MC P<MC P=MR P=MC

P=MC

Firms in perfectly competitive markets face demand curves that are _____.

Perfectly elastic

Long run

The period of time of sufficient length that all of the firm's factors of production are variable

Imperfectly competitive firm (or price setter)

a firm that has at least some control over the market price of its product

Price takers

a firm that has no influence over the price at which it sells its product

Profit-maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

The demand curve facing a firm in a perfectly competitive market is

a horizontal line at the equilibrium price.

Factor of production

an input used in the production of a good or service

Variable Factor

an input whose quantity can be altered in the short run. (labor)

Fixed factor

an input whose quantity cannot be altered in the short run. (bottle-making machine)

Profitable if

its revenue (PxQ) exceeds its total cost (ATC x Q)

At each point along a market supply curve, price measures each seller's _____

marginal cost of production

Law of diminishing returns

simply that successive increases in the labor input eventually yield smaller and smaller increments in output. -marginal cost eventually increase

Producer Surplus (PS)

the amount by which price exceeds the seller's reservation price

A profit-maximizing firm chooses the level of output that maximizes

the difference between its total revenue and its total cost.

In the short run, a profit-maximizing firm will not produce anything if

the firm's revenue is less than its variable cost at all levels of production.

Short Run

the period of time sufficiently short that at least some of the firm's factors of production are fixed

total cost (TC)

the sum of all payments made to the firm's fixed and variable factors of production -FC + VC

Fixed cost (FC)

the sum of all payments made to the firm's fixed factors of production (cannot be altered on a daily basis)

Variable cost (VC)

the sum of all payments made to the firm's variable factors of production -is the sum of all payments the firm makes to inputs whose quantities can be altered in the short run.

Marginal cost (MC)

the increase in total cost that results from carrying out one additional unit of an activity -the change in total cost divided by the corresponding change in output. (quantity changes) -curve must intersect both the AVC and ATC curves at their respective minimum points

Profit

the total revenue a firm receives from the sale of its product minus all costs ---explicit and implicit---incurred in producing it. -(P x Q) - (ATC x Q) =total revenue - total cost =total revenue - Variable cost - fixed cost

average total cost (ATC)

total cost divided by total output. TC/Q

Suppose an artist can easily change the number of hours she spends working each month. In deciding how many paintings to paint each month, the opportunity cost of the artist's time is considered a _____.

variable cost Reason: Since the amount of time the artist spends working each month can be easily changed, it's considered a variable input, and the opportunity cost of the artist's time is a variable cost.

Average variable cost (AVC)

variable cost divided by total output