Econ Chapters 5,6,7

4 Characteristics of Perfectly Competitive Markets

1. All firms sell the same standardized product. This condition implies that buyers are willing to switch from one seller to another if by so doing they can obtain a lower price. 2. The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged. This condition implies that individual buyers and sellers will be price takers, regarding the market price of the product as a fixed number beyond their control. 3. Productive resources are mobile. This condition implies that if a potential seller identifies a profitable business opportunity in a market, he or she will be able to obtain the labor, capital, and other productive resources necessary to enter that market. 4. Buyers and sellers are well informed. This condition implies that buyers and sellers are aware of the relevant opportunities available to them.

Perfectly Discriminating Monopolist

A firm that charges each buyer exactly his or her reservation price.

Imperfectly Competitive Firm

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

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. (Perfectly Competitive Market)

Profit-Maximizing Firm

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

Market Power

A firm's ability to raise the price of a good without losing all its sales.

Pure Monopoly

A market in which a single firm is the lone seller of a unique product.

Perfectly Competitive Market

A market in which no individual supplier has significant influence on the market price of the product.

Natural monopoly

A monopoly that results from economies of scale

Long Run

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

Short Run

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

Law of Diminishing Returns

A property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it. The law says that when some factors of production are fixed, increased production of the good eventually requires ever larger increases in the variable factor.

Efficient

A situation is efficient if no change is possible that will help some people without harming others.

Oligopoly

A structure in which the entire market is supplied by a small number of large firms.

What is the invisible hand theory?

Adam Smith's theory that the actions of independent, self-interested buyers and sellers will often result in the most efficient allocation of resources.

Economic Loss

An economic profit that is less than zero.

Monopolistic Competition

An industry structure in which a large number of firms produce slightly differentiated products that are reasonably close substitutes for one another.

Factors of Production

An input used in the production of a good or service.

Variable Factor of Production

An input whose quantity can be altered in the short run.

Fixed Factor of Production

An input whose quantity cannot be altered in the short run.

Barriers to Entry

Any force that prevents firms from entering a new market

Allocative Function of Price

Changes in prices direct resources away from overcrowded markets and toward markets that are underserved.

Rationing Function of Price

Changes in prices distribute scarce goods to those consumers who value them most highly.

Average Fixed Cost

Fixed Cost/Quantity

Supply Curve

For any price, it tells us the quantity that sellers wish to supply at that price.

Perfect Hurdle

Is one that separates buyers precisely according to their reservation prices, and in the process imposes no cost on those who jump the hurdle.

Economic Rent

Is that portion of the payment for an input that is above the supplier's reservation price for that input.

What causes the supply curve to shift?

New technologies, changes in input prices, changes in the number of sellers, expectations of future price changes, and changes in the prices of other products that firms might produce.

Why are gasoline prices so much more volatile than car prices?

One is that the short-run price elasticity of demand for gasoline is much smaller than the corresponding elasticity for cars. The other is that supply shifts are much more pronounced and frequent in the gasoline market than in the car market.

Price Elasticity of Supply Equation

P/Q x 1/slope

Why do many movie theaters offer discount tickets to students?

People with low incomes generally have lower reservation prices for movie tickets than people with high incomes. Because students generally have lower disposable incomes than working adults, theater owners can expand their audiences by charging lower prices to students than to adults.

Perfectly Elastic Supply

Supply is perfectly elastic with respect to price if elasticity of supply is infinite. (Horizontal)

Perfectly Inelastic Supply

Supply is perfectly elastic with respect to price if elasticity of supply is infinite.(Vertical)

Why do supermarket checkout lines all tend to be roughly the same length?

Suppose you saw one line that was significantly shorter than the others as you wheeled your cart toward the checkout area. Which line would you choose? The shorter one, of course; because most shoppers would do the same, the short line seldom remains shorter for long.

Total Cost

TC = FC + MC*Q FC=Fixed Cost MC=Marginal Cost Q=Quantity

Why might an appliance retailer instruct its clerks to hammer dents into the sides of its stoves and refrigerators?

The Sears "Scratch 'n' Dent Sale" is another example of how retailers use quality differentials to segregate buyers according to their reservation prices. Many Sears stores hold an annual sale in which they display appliances with minor scratches and blemishes in the parking lot at deep discounts. People who don't care much about price are unlikely to turn out for these events, but those with very low reservation prices often get up early to be first in line. Indeed, these sales have proven so popular that it might even be in a retailer's interest to put dents in some of its sale items deliberately.

Explicit Costs

The actual payments a firm makes to its factors of production and other suppliers.

Marginal Revenue

The change in a firm's total revenue that results from a one-unit change in output.

Accounting Profit

The difference between a firm's total revenue and its explicit costs. Accounting Profit=TR-EC

Economic Profit

The difference between a firm's total revenue and the sum of its explicit and implicit costs. Economic Profit=TR-(EC+IC)

What does the upward slope of the supply curve reflect?

The fact that costs tend to rise at the margin when producers expand production

Why does Intel sell the overwhelming majority of all microprocessors used in personal computers?

The fixed investment required to produce a new leading-edge microprocessor such as the Intel Pentium chip currently runs upward of $2 billion. But once the chip has been designed and the manufacturing facility built, the marginal cost of producing each chip is only pennies. This cost pattern explains why Intel currently sells more than 80 percent of all microprocessors.

When recycling is left to private market forces, why are many more aluminum beverage containers recycled than glass ones?

The high redemption prices for aluminum cans induce many people to track these cans down, whereas the low redemption prices for glass containers lead most people to ignore them.

Are there "too many" smart people working as corporate earnings forecasters?

The more analysts invest in the development of these models, the more accurate the models become. Thus, the analyst whose model produces a reliable forecast sooner than others can reap a windfall by buying stocks whose prices are about to rise. Given the speed with which stock prices respond to new information, however, the results of even the second-fastest forecasting model may come too late to be of much use.

Normal Profit

The opportunity cost of the resources supplied by the firm's owners; Normal profit = Accounting profit − Economic profit.

Implicit Costs

The opportunity costs of the resources supplied by the firm's owners.

Price Elasticity of Supply

The percentage change in the quantity supplied that occurs in response to a 1 percent change in the price of a good or service.

Hurdle Method of Price Discrimination

The practice by which a seller offers a discount to all buyers who overcome some obstacle.

Price discrimination

The practice of charging different buyers different prices for essentially the same good or service.

Total Cost

The sum of all payments made to the firm's fixed and variable factors of production.

Fixed Cost

The sum of all payments made to the firm's fixed factors of production.

Variable Cost

The sum of all payments made to the firm's variable factors of production.

Profit

The total revenue a firm receives from the sale of its product minus all costs—explicit and implicit—incurred in producing it.

Average Total Cost

Total cost divided by total quantity.

Increasing Returns to Scale/Economies of Scale

When all inputs are changed by a given proportion, output changes by more than that proportion.

Constant Returns to Scale

When all inputs are changed by a given proportion, output changes by the same proportion.

What maximizes profit?

When marginal cost = marginal revenue

When is total economic surplus maximized?

When marginal cost = price

The main difference between perfectly competitive firms and imperfectly competitive firms

Whereas the perfectly competitive firm faces a perfectly elastic demand curve for its product, the imperfectly competitive firm faces a downward-sloping demand curve.