Chapter 10: Perfect Competition

Two questions a firms executives should be able to answer...

1. How much output should the firm produce to maximize profits? 2. What are the firm's profits expected to be at that level of output?

Two most important questions firms must answer??

1. what price it should charge 2. how much output it should produce

Produce at loss if ...

AVC <= P < ATC

long-run equilibrium

a market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms

constant-cost industry

an industry in which the firms' cost structures do not vary with changes in production

For a perfectly competitive firm, the portion of the marginal cost curve that is ________ the minimum point of the average variable cost curve

at or above

How much output to produce should be answered by...

comparing marginal revenue to marginal cost or P=MC

"What are the firm's profits expected to be at that level of output?" addresses...

economic profit

the more substitutes a product has the more _______ the demand will be

elastic

when consumers are relatively sensitive to changes in price, demand is considered to be ______

elastic

In the short run, the supply curve for a firm is the ________ cost at or above the average __________ cost curve

marginal variable

Once you understand perfect competition, you'll have a framework for understanding...

other, less competitive, market structures

individual firms in __________ markets are unable to have any control over the prices they charge for their products

perfectly competitive

Individuals in perfectly competitive markets are ______

price takers

For perfectly competitive firms, what three are always equal?

price, marginal revenue, and average revenue

allocative efficiency

producing the goods and service most wanted by society

marginal revenue

the change in a firm's total revenue that results from a 1-unit change in output produced and sold

normal profit (zero economic profit)

the level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is down just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry.

Perfectly competitive markets represent ...

the starting point for examining market efficiency and understanding the process by which prices and quantities are determined.

If market price (which is equal to the marginal revenue) is >= AVC at the profit-maximizing level of output ...

then the firm should continue to produce in the short run

If market price (which is equal to the marginal revenue) is < AVC at the profit-maximizing level of output ...

then the firm should shut down in the short run until economic conditions change

price takers

Firms that take or accept the market price and have no ability to influence that price.

shutdown point

Graphically, this point occurs where the price, or marginal revenue curve, intersects the marginal cost curve at the minimum point of the average variable cost curve

shutdown point

Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost.

Shut down if ...

P < AVC

perfect competition

a market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, product. These sellers are price takers, can sell as much output as they choose to produce at the market price, and have the ability to easily enter or exit an industry.

long-run supply curve

a supply curve that represents the long-run relationship between price and quantity supplied

short-run supply curve

a supply curve that represents the short-run relationship between price and quantity supplied

What characteristics do perfectly competitive firms share?

all produce a standardized good or service it is easy for many firms to enter or exit the market

productive efficiency

producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service

allocative efficiency

producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost

As the market price increases, all else held constant, a _____________ can afford to expand its production.

profit-maximizing firm

average revenue

revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold

economic profit

the level of profit that occurs when total revenue is greater than total cost

loss

the level of profit that occurs when total revenue is less than total cost

shutdown point

the price below which a firm will choose not to operate in the short run.