Chapter 12

What happens to the price and profit of the individual laptop produced in the short​ run?

They both rise.

Despite the fact that few firms sell identical products in markets where there are no barriers to​ entry, economists believe that the model of perfect competition is important because

it is a benchmark long dash —a market with the maximum possible competition long dash —that economists use to evaluate actual markets that are not perfectly competitive.

Economic profit is a​ firm's revenues minus all its​ costs

implicit and explicit.

minimum point on the marginal cost curve

is below the average variable cost of production. At this​ point, if a firm​ produces, it will suffer a loss that is greater than its fixed costs of production.

In a perfectly competitive industry with increasing average​ costs, the​ long-run supply curve will be

upward sloping.

TC

ATC x Q

VC

AVC x Q

Marginal revenue (MR)

The change in total revenue from selling one more unit of a product.

economic​ profit

accounting profit - opportunity cost of time

return should

be included in the​ firm's costs because it is the opportunity cost of not investing those funds elsewhere

market for cage​-free eggs in 2015 was not in equilibrium

because farmers who were raising​ cage-free chickens were earning higher profits than farmers who were raising chickens using more traditional methods.

Constant-cost industries

have horizontal​ long-run supply curves. Any industry in which the typical​ firm's average costs do not change as the industry expands production will have a horizontal​ long-run supply curve.

In the short​ run

it makes sense to operate as long as price is higher than variable costs.

You should continue running

the copy store as long as the revenue you earn covers your variable costs. The rent and interest and repayment on the loan are fixed costs that have been already paid​ and, therefore, should be ignored in the short run​ (until the​ year's lease is​ over).

What will happen in the laptop market in the long​ run?

Firms will enter the market.

p =

MR = AR

Productive efficiency

The situation in which a good or service is produced at the lowest possible cost.

allocative​ efficiency?

Allocative efficiency is when every good or service is produced up to the point where the marginal benefit for consumers the marginal benefit for consumers equals the marginal cost of producing it the marginal cost of producing it.

As production of laptop displays​ increases, firms in the industry can now enjoy economies of scale. In the short​ run, makers of laptop displays will​ what?

Be able to earn economic profit.

Does the market system result in allocation​ efficiency?

In the long​ run, perfect competition results in allocative efficiency because firms produce where price equals marginal cost.

Does the market system result in productive​ efficiency?

In the long​ run, perfect competition results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.

It is reasonable to expect game companies to continue to develop mobile games in the long run if they break even for two reasons

First, when a firm breaks even on a mobile​ game, it earns enough revenue to cover all its costs of​ production, including its investment in the game. ​Second, companies such as Proletariat may be able to earn​ short-run economic profits from future new games even if competition reduces its​ long-run profits to zero

What are the three conditions for a market to be perfectly​ competitive?

For a market to be perfectly​ competitive, there must be many buyers and​ sellers, with all firms selling identical​ products, and no barriers to new firms entering the market.

Assume the market for oranges is perfectly competitive. If the demand for oranges​ increases, will the market supply additional​ oranges?

If the demand for oranges​ increases, then the market will supply additional oranges because producers seek the highest return on their investments.

What is the relationship between a perfectly competitive​ firm's marginal cost curve and its supply​ curve?

A​ firm's marginal cost curve is equal to its supply curve for prices above average variable cost.

Don't firms also benefit from cost reductions because they are able to earn greater​ profits?

No. Because​ short-run profits encourage​ entry, firms earn zero economic profit in the long run.

TR

P x Q

How does perfect competition lead to allocative and productive​ efficiency?

Perfect competition leads to allocative and productive efficiency A. because prices reflect consumer preferences. B. because firms are motivated by profit.

How is the market supply curve derived from the supply curves of individual​ firms?

The market supply curve is derived by horizontally adding the individual​ firms' supply curves

The​ long-run supply curve is

a horizontal line equal to the minimum point on the typical​ firm's average total cost curve.

Accounting profit is a​ firm's

net income measured by revenue minus operating expenses and taxes paid.

price is below average total​ cost,

then existing firms will incur economic losses and some firms will exit.

In perfect​ competition, long-run equilibrium occurs when the economic profit is

zero

Marginal revenue

(MR) Change in total revenue from selling one more unit of a product.

price​ taker?

- A price taker is a firm that is unable to affect the market price. - A price taker is a buyer or a seller that is unable to affect the market price. Firms that are price takers face horizontal demand curves and have no market power.

Which of the following statements is true when the difference between TR and TC is at its maximum positive​ value?

- MR​ = MC - Slope of TR​ = Slope of TC

maximizing​ profits, MR

= MC is equivalent to P​ = MC

Price taker

A buyer or seller that is unable to affect the market price.

Sunk cost

A cost that has already been paid and cannot be recovered.

Long-run supply curve

A curve that shows the relationship in the long run between market price and the quantity supplied.

Break-even point:

A firm is breaking even when its total cost equals its total revenue. Since perfectly competitive firms produce where price equals marginal​ cost, this occurs when price equals the lowest point on the average total cost curve​ (where the marginal cost curve intersects the average total cost​ curve).

When are firms likely to be price​ takers?

A firm is likely to be a price taker when it represents a small fraction of the total market

Economic profit

A firm's revenues minus all its costs, implicit and explicit.

Perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market

Why are consumers so powerful in a market​ system?

Because it is​ consumers' demand that influences the market price and dictates what producers will supply in the market.

When are firms likely to enter an​ industry? When are they likely to​ exit?

Economic profits attract firms to enter an​ industry, and economic losses cause firms to exit an industry.

Production decision in the short​ run:

If the firm​ produces, then it will produce an output level where price equals marginal cost. If price is greater than average total​ cost, then the firm will make a profit. If price is equal to average total​ cost, then the firm will break even. If price is less than average total​ cost, then the firm will experience losses. OK

Explain why it is true that for a firm in a perfectly competitive market that P​ = MR​ = AR.

In a perfectly competitive​ market, P​ = MR​ = AR because firms can sell as much output as they want at the market price. Your answer is correct.

What is the difference between a​ firm's shutdown point in the short run and its exit point in the long​ run?

In the short​ run, a​ firm's shutdown point is the minimum point on the average variable cost​ curve, while in the long​ run, a​ firm's exit point is the minimum point on the average total cost curve.

Shut-down point in the short​ run:

In the short​ run, if price is greater than average variable cost​, then the firm should continue to produce​ (because the firm would lose an amount less than fixed costs by shutting​ down). ​However, if price is less than average variable cost​, then the firm should stop production by shutting down. The ​$24.00 price is greater than average variable​ cost, so the firm should continue to produce.

Would a firm earning zero economic profit continue to​ produce, even in the long​ run?

In​ long-run competitive​ equilibrium, a firm earning zero economic profit will continue to produce because such profit corresponds with positive accounting profit corresponds with positive accounting profit.

Because the price of laptops falls in the long run as output​ increases, what is true about this​ industry?

It is a​ decreasing-cost industry.

What is the relationship between​ price, average​ revenue, and marginal revenue for a firm in a perfectly competitive​ market?

Price is equal to both average revenue and marginal revenue.

productive​ efficiency?

Productive efficiency is when a good or service is produced at lowest possible cost.

Briefly discuss the difference between these two concepts

Productive efficiency pertains to production within an industry while allocative efficiency pertains to production across all industries.

Profit for a perfectly competitive firm can be expressed as

Profit equals=left parenthesis Upper P minus ATC right parenthesis times Upper Q (P−ATC)×Q​, where P is​ price, Q is​ output, and ATC is average total cost. This is the correct answer.

Productive efficiency

The situation in which a good or service is produced at the lowest possible cost. The forces of competition will drive the market price to the minimum average cost of the typical firm. That​ is, in the long​ run, firms will enter and exit a competitive market until they break even​ (where price equals minimum average​ cost).

supply curve for a perfectly competitive firm in the short​ run?

The supply curve for a firm in a perfectly competitive market in the short run is that​ firm's marginal cost curve for prices at or above average variable cost.

Why are firms willing to accept losses in the short run but not in the long​ run?

There are sunk costs in the short run but not in the long run

Average revenue (AR)

Total revenue divided by the quantity of the product sold.

Profit

Total revenue minus total cost.

In the figure to the​ right, Sacha Gillette reduces her output from 8250 to 6250 dozen eggs when the price falls to ​$ 1.80. At this price and this output​ level, she is operating at a loss. What option does Gillette have in this​ situation?

Try to cut her costs of production to decrease the loss in the short run.

why it is true that for a firm in a perfectly competitive​ market, the​ profit-maximizing condition MR​ = MC is equivalent to the condition P​ = MC.

When maximizing​ profits, MR​ = MC is equivalent to P​ = MC because the marginal revenue curve for a perfectly competitive firm is the same as its demand curve.

If U.S. demand for beef continues to​ increase, in the long​ run, beef prices will

fall because the supply of beef will increase as new firms enter the industry.

Decreasing-cost industries

have​ downward-sloping long-run supply curves. Any industry in which the typical​ firm's average costs decrease as the industry expands production will have a​ downward-sloping long-run supply curve.

Increasing-cost industries

have​ upward-sloping long-run supply curves. Any industry in which the typical​ firm's average costs increase as the industry expands production will have an​ upward-sloping long-run supply curve.

​ long-run supply curve shows

the relationship between market price and the quantity supplied. If market price is above average total​ cost, then existing firms will earn economic profit and new firms will enter the industry. If price is below average total​ cost, then existing firms will incur economic losses and some firms will exit.

Perfectly competitive market

A market that meets the conditions​ of: ​(1) many buyers and​ sellers, ​(2) all firms selling identical​ products, and ​(3) no barriers to new firms entering the market.

Allocative​ efficiency:

A state of the economy in which production represents consumer preferences. In​ particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. Perfectly competitive markets are allocatively efficient​ because: 1. The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold. 2. Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit. 3. Firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Allocative efficiency

A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

why firms​ don't maximize revenue rather than profit​?

At the point where revenue is​ maximized, the difference between total revenue and total cost may not be maximized.

Economic​ profit:

A​ firm's revenues minus all its​ costs, implicit and explicit.

Break-even point:

Breaking even occurs when a firm earns zero economic profit.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run?

In a perfectly competitive industry in the long​ run, new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

Entry and exit​ decisions:

In the long​ run: If P​ > ATC​, then new firms will enter the market. If new firms​ enter, then the market supply curve will shift to the right and decrease the market price. If P​ < ATC, then existing firms will exit. If existing firms​ exit, then the market supply curve will shift to the​ left, and increase the market price. Since firms are entering entering the​ industry, market supply will increase​, decreasing decreasing the market price

How should firms in perfectly competitive markets decide how much to​ produce?

Perfectly competitive firms should produce the quantity where the difference between total revenue and total cost is as large as possible.

The supply curve for a​ firm:

Tells us how many units of a product the firm is willing to sell at any given price. The marginal cost curve for a firm in a perfectly competitive market tells us the same thing. The firm will produce at the level of output where price equals marginal cost. ​Therefore, a perfectly competitive​ firm's marginal cost curve is also its supply curve. ​However, if a firm is experiencing​ losses, it will shut down if its total revenue is less than its variable cost. That​ is, if price drops below average variable​ cost, the firm will have a smaller loss if it shuts down and produces no output. ​So, the​ firm's marginal cost curve is its supply curve only for prices at or above average variable cost.

Suppose the market for cotton is perfectly competitive and that input prices increase as the industry expands. Characterize the​ industry's long-run supply curve

The cotton​ industry's long-run supply curve will be upward sloping because the​ long-run average cost of production will be increasing.

Shutdown point

The minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

Shutdown point

The minimum point on a​ firm's average variable cost​ curve; if the price falls below this​ point, the firm shuts down production in the short run.

Economic loss

The situation in which a firm's total revenue is less than its total cost, including all implicit costs.

Long-run competitive equilibrium

The situation in which the entry and exit of firms has resulted in the typical firm breaking even.

Which of the following terms best describes a state of the economy in which production reflects consumer​ preferences?

allocative efficiency

Long-run equilibrium in perfect competition results in

allocative efficiency & productive efficiency

profit begins to decline

at output levels below the point where revenue is​ maximized; therefore, a firm maximizing revenue produces too much output.

Profit is maximized

at the output level where marginal revenue equals marginal cost.

If game companies can only break even on the mobile games they​ develop, in the long​ run, we would expect them to

continue to develop mobile games because they can cover all costs of production if they break even.

What dynamics best describe the factors at play in this​ market? Market entry for visual effect companies is relatively

easy, so firms can expect to earn zero economic profit in the long run.

In a perfectly competitive industry with constant​ costs, the​ long-run supply curve will be

horizontal

The lure of short​-run economic profits should result

in an increase in the number of farmers who raise​ cage-free chickens. This will increase the supply of​ cage-free chickens, resulting in a higher quantity produced and a lower price.

reason for studying the model of perfect competition is important because

it is a benchmark long dash —a market with the maximum possible competition long dash —that economists use to evaluate actual markets that are not perfectly competitive.

the increase in total revenue that results from selling one more unit of output is

marginal revenue

As described in the chapter​ opener, the market for cage​-free eggs in 2015 was

not in equilibrium because farmers who were raising​ cage-free chickens were earning higher profits than farmers who raised chickens using more traditional methods.

As the demand for​ cage-free eggs​ increases

other things​ equal, the price would increase.​ However, as the price increases and firms earn higher​ profits, the industry supply curve will shift to the right as the number of farmers who raise​ cage-free chickens rises. If this is a​ constant-cost industry, the price will decrease in the long run to what it was prior to the increase in demand.

perfectly competitive​ market,

price is determined by the intersection of market demand and supply. An individual corn farmer has no ability to affect the market price for corn. ​ Therefore, the demand curve for one corn farmer is a horizontal line equal to the market price.

Which of the following terms best describes the result of the forces of competition driving the market price to the minimum average cost of the typical​ firm?

productive efficiency

find economic​ profit

subtract the opportunity cost of her time and the funds she is using from her accounting profit.

In the long run in the market for cage​-free ​eggs, we would expect

the equilibrium price to decrease and the equilibrium quantity to​ increase, as more firms enter.

If output is​ increased

the loss would rise since the marginal cost of the additional output would be greater than the marginal revenue.

In perfect competition

the market demand curve is downward sloping while demand for an individual​ seller's product is perfectly elastic.

market price is above average total​ cost

then existing firms will earn economic profit and new firms will enter the industry.

demand curve is​ horizontal for a firm

then its marginal revenue curve is horizontal as well.

firm uses its own funds to finance its​ operations

there is an implicit cost to those funds because the firm could have invested them elsewhere. Therefore, it is correct to include the opportunity cost of the​ firm's funds that it used to develop and receive approval for the drug.