Microeconomics Perfect Competition Monopoly

Short run

A period during which at least one of a firm's resources (factors of production) is fixed.

Long run

A period of sufficient time to alter all factors of production used in the productive process - all inputs can be changed.

Break Even Point

When economic profits = 0, and total revenue = total costs. The total revenue increases faster than total costs. break even price: P=minimum ATC Rhyme to remember: BEP = Minimum ATC

Marginal Principle

compares increasing the level of an activity as long as its marginal benefit exceeds its marginal costs. Decrease the level of an activity if the marginal costs exceed marginal benefit. If possible choose the level at which the marginal benefit equals the marginal cost. what i wrote: increases quantity utilization marginal revenue = marginal cost marginal revenue = price ...for perfect competiton.

Economies of Scale

costs fall as the firm gets benefits from operating at a larger level

Naturally Monoply

-acception to govt. ban on monopolies because its beneficial to society. -imposed average cost pricing, price ceilings, and stronger taxes. -Example: edison

Monopoly Characteristics

-one firm sells unique product - firm is a price maker -highly inefficient -high barriers to entry (Economies of scale) -high profits in the long run -Example: electricity

Why normal profits are made in the long run in perfect competition (supernormal profits)

1. Supernormal profits are made in the short run by individual firms 2. Market supply increases as new firms enter the market 3. Price decreases as supply increases 4. As price decreases, normal profits are made in the long run

Total Cost

= total fixed cost + total variable cost

Average revenue

Average revenue Total revenue divided by the quantity of output sold. AR = Price

Variable Cost

Change in cost * Amount of out put

Normal profit

Economic profit = 0. AR = ATC at the profit maximising level of output.The revenue needed to keep a firm in an industry (in order to cover all opportunity costs of production)

Allocative efficiency

Is achieved when the particular combination of goods that are produced by firms match consumer preferences. P = MC

Marginal Profit

MR-MC

What is the Relationship between Demand and marginal revenue?

MR=D=AR=P The curve for demand and marginal revenue are horizontal for the firm. (Mr. Darth)

Profit maximising level of output

MR=MC

What curve does the Short-Run Supply curve equal?

Marginal Cost Curve S = MC above the minimum AVC.

MR Curve Downward sloping (Monopoly)

Marginal revenue is also downward sloping but that sits below the demand curve. Monopolist will produce in the elastic region of its demand curve, where MR >0

Diseconomies of Scale

Once the firm reaches its optimum or most efficient level, any further expansion will causee costs to rise as the firm has grown too large

Monopoly Socially optimal output

P=MC

Shut-down price

Price = minimum ATC at the profit maximising level of output (MR = MC)

Shut-down price in the short-run

Price = minimum AVC at the profit maximising level of output (MR = MC)

Profit Monopoly

Price > Atc for profit where MR = MC Output Profit maximized in space between demand and ATC curve

Perfectly elastic demand curve

Price elasticity of demand = 0. Any attempt by the firm increase its price above that determined by the market will result in zero units of output being sold.

Shutdown Rule

Short run: If "P<ATC" and "P>AVC", then the firm continues to stay open and minimize its losses. If "P>ATC" and "P<AVC" then the firm will temporarily shut down and minimize its losses. If "P<ATC" and "P=AVC" then its indifferent. Long Run: Exit if P is less than ATC.

Profit

TR-TC TR = P * Q

Constant Returns to Scale

Technically, the term means that the quantitative relationship between input and output stays constant, or the same, when output is increased. Constant returns to scale mean that the firm's long-run average cost curve remains flat.

Marginal revenue

The change in total revenue from an additional unit sold Change in total revenue/change in quantity

Fixed costs

The difference between total costs and variable costs. Costs that do not vary as a firm increases output.

P = minimum AVC

The firm has a loss that is equal to its fixed costs - this is the shut-down price in the short-run

ATC > P > AVC

The firm will make a loss (negative economic profit, subnormal), and as the loss is less than its fixed costs it will still continue to produce in the short-run

P > ATC

The firm will make an economic profit (positive, supernormal).

P = minimum ATC

The firm will make zero economic profit (normal profit), and this is the break-even price for the firm

The firm's supply curve

The firm's marginal cost curve above the shutdown point at the profit maximising level of output (MR = MC)

P < AVC

The price is now below the shut-down price the firm stops operations and will not produce any output and its loss becomes equal to the fixed costs the firm is still obliged to pay.

Marginal Cost

Total Cost incurred for each additional unit of output. Change in total cost/change in quantity

Average total cost

Total cost divided by the quantity of output

Why is Demand Curve Downward sloping (Monopoly)?

demand is downard sloping because it represents the entire industries demand.