Economics Ch. 9

Short-run firm supply curve

a graph of the systematic relationship between a product's price and a firm's most profitable output level.

Decreasing-Cost industry

a highly unusual situation in which the long-run supply curve is downward sloping. through the expansion of output by the industry in some way lowers the cost curves of the individual schools, leading to a new long-run equilibrium with a higher output but a lower price.

A constant cost competitive industry is characterized by

a horizontal long-run supply curve . The industry can expand with no increase in price along LS

Perfect Competition

an economic model characterized by the assumption of: large numbers of buyers and sellers, free entry and exit, product homogeneity and perfect information.

Constant-cost industry

an industry in which expansion of output does not bid up input prices, the long-run average production cost per unit remains unchanged, and the long-run industry supply curve is horizontal

Increasing-Cost Industry

an industry in which expansion of output leads to higher long-run average production costs and the long-run supply curves slopes upward.

Each firm's MC curve indicates how much the firm will produce

at alternative prices.

Since a competitive market is characterized by a large number of firms selling the same product,

each firm supplies only a small fraction of the entire industry output. this causes its output decisions to have a small effect on the market price.

Long-run equilibrium has three characteristics

first, the representative competitive firm is maximizing profit where LMC equals price. Second, there must be no incentive for firms to enter or leave the industry. (this occurs when firms are making zero economic profits) Third, the combined quantity of output of all the firms at the prevailing price equals the total quantity consumers wish to purchase at that price. (if this wasnt satisfied you would have excess demand or excess supply and the price would not be an equilibrium one.)

Halting productions

may be only a temporary move until market conditions improve and is not the same things as going out of business.

A horizontal demand ccurve has an elasticity

of infinity. Can not charge more.

U know that a firm is selling in a competitive market because the

price (p) is constant reardless of the output level.

The market demand relates to total purchases (from all firms) to the price it interacts with supply curve to determine

price and quantity.

Total revenue

price times the quantity sold

The shaded rectangle

shows total profit for that output

Shutting down will not avoid a loss

since the firm remains liable for its fixed cost whether or not it operates. the relevant question is whether the firm will lose less by continuing to operate or by shutting down.

to derive the competitive industry's short-run supply curve we horizontally

sum individual firms' supply curve. We cannot similiarly derive a competitive industry's long rin supply curve beacuse in the long run firms enter or exit the industry in resnse to the economic profits being earned.

Zero economic profit means

that the various inputs, including capital provided by the owners can earn just as much somewhere else.

Profit Maximization

the assumption that firms select an output level so as to maximize profit

marginal revenue

the change in total revenue when there is a one unit change in output. A firm in a competitive market can sell one more unit of output without reducing the price it receives for its previous units, so total revenue will rise by an amount equal to the price.

total profit

the difference between total revenue and total cost.

a perfectly competitive market may find itself in the situation of suffering a loss no matter what output level it produces. In that event

the firm has two alternatives: it can continue to operate at a loss, or it can shut down.

Because ATC curve lies above the price line everywhere

the firm incurs losses at all output levels

If MC>MR

the firms profit will increase by decreasing output if MC>MR

For a constant-cost industry

the increased employment of inputs associated with expanding output occurs without an increase in the price of individual inputs.

Where the average revenue is flat or constant

the marinal revenue equals the average revenue.

Shutdown point

the minimum level of average variable cost below which a firm will cease to operate.

On a SR per unit curve

the most profitable output level occurs where marginal cost and marginal revenue are equal.

survivor principle

the observation that in competitive markets, firms that do not approximate profit maximizing behavior fail, and survivors are those firms that, intentionally or not, make the appropriate profit maximizing decisions.

Zero economic Profit

the point at which total profit is zero since price equals the average cost of production

When the Tc and TR curves are farthest apart

the slopes of tr and tc are equal reflecting an equality between marginal revenue and marginal cost.

Many factors can affect a competitive firms output decision

the two most common are variations in the product price and variations in the price of inputs used in production

average profit per unit

total provid divided by number of units sold.

Average revenue

total revenue/ output.

Price taker

A firm or consumer who cannot affect the prevailing price through production and consumption decisions.

the intersection of the demand curve with the supply curve

identifies the price where total quantity demanded equals total quantity supplied

the demand curve facing a competitive firm is drawn to be perfectly horizontal

A horizontal demand curve means that firms can sell as much output as it wants without affecting the product's price.

Free Entry and Exit

A situiation in which there are no differential impediments across firms in the mobility of resoures into and out of an industry

product homogeneity

All firms in the industry must be producing a standardized or homogeneous product. Standardized products that, in the eyes of consumers, are perfect substitutes for one another.

Perfect information

Firms, consumers, and resource owners must have all the information necessary to make the correct economic decisions.

Four conditions characterizing perfect competition

Large numbers of buyers and sellers, Free entry and exit, product homogeneity, perfect information

Large Numbers of Buyers and Sellers

The presence of a great man independent participants on each side of the market, none of whom is large in relation to total industry sales or purchases, normally gurantees that individual particpation actions will not significantly affect the market price and overall industry output.

positive economic profit

implies that resources invested in the industry generate a return higher than what could be earned elsewhere.

We refer to this derivation of te short-run industry supply curve

as a horizontal summation of the individual firm's short-run MC curves because because we are horizontally summing quantities across firms

derive the long-run supply curve for an increasing-cost industry

assume an initial long-run equilibrium; then the demand curve shifts, and we follow the adjustment process through to its conclusion.

How increasing-cost industry is affected in the long-run adjustment process

at the short run equilibrium, positive economic profits lead to entry by new schools and an expansion inindustry output a rightward shif in the ss curve. Increased insustry output now tends to reduce profits in two ways: First the higher output will cause prices to fall, which reduces profits. Second, the increased demand for inputs that accompanies the expansion in industry output leads to higher input prices. Higher input prices mean higher production costs, which also reduce profits. Profits are thus caught in a two-way squeeze as the industry expands. this continues until economic profits equal zero.

An increasing-cost competitive industry is characterized

by an upward-sloping long-run supply curve. The industry can produce an increased output only if it receives a higher price, because the cost of production rises (cost curves shift upward) as the industry expands. The term increasing cost indicates that the cost curves of all schools shift upward as the industry expands and input prices are bid up.

The MC curve

can be though of as the firm's supply curve in the short run, since it identifies the most profitable output for each possible price.

Based on the 3 possible effects of industry size on input prices competitive industries are classified as

constant-cost, increasing-cost, or decreasing-cost industries

The derivation of a long-run industry supply curve

in a competitive market depends centrally on what happens to input prices as the industry expands or contracts. the long-run relationship between price and industry output, which depends on whether input prices are constant, increasing, or decreasing as the industry expands or contracts.

New entry also results

in the industry short-run supply curve shifting to the right and a decrease in price. this continues until the market demand curve and the new industry supply curve intersect at the same price. where long-run MC equals the minimum point on the representative firm's long-run average total cost curve. This continues until any positive economic profit signal and hence incentive for entry are eliminated. There is no incentive to any longer enter the industry.

the height of the rectangle

is average revenue

Short-run industry supply curve

is derived by simply adding the quantities produced by each firm. That is by summing the individual firm's marginal cost curves horizontally.

The assumption of a horizontal demand curve confronting a competitive firm does not mean that the price never changes

it just means that the firm, acting by itself cannot affect the going price.

An expansion of output leads to an increase in some input prices

to produce more output, schools must increase their demand for inputs, and some inputs are assumed to be available in larger quantities only at higher prices.

To derive the long-run supply curve for a constant-cost industry,

we start from a position of equilibrium and trace the effects of a demand change until the industry one again returns to a long-run equilibrium.

The rule for profit maximization for firms in general is to prduce

where MC=MR or MC=P for a competitive market.

In the short run a competitive firm will produce at a point

where its marginal cost equals marginal revenue a long as the price is above the minimum point of the average variable cost curve.

At any rate of output

where marginal revenue is greater than marginal cost, the firm can increase its profits by increasing output.