Microeconomics Midterm 2

Four Conditions of a price taker market:

1All the firms in the market produce an identical product. 2A large number of firms exist in the market 3Each firm supplies only a very small portion of the total amount supplied to the market. 4No barriers limit the entries or exits of firms in the market

Pure Competition

A market structure characterized by a large number of small firms producing an identical product in an industry (market area) that permits complete freedom of entry and exit. Also called price-taker markets.

decreasing-cost industry

An industry for which costs of production decline as the industry expands. The market supply is therefore inversely related to price. Such industries are atypical. The market supply curve will slope downward and to the right.

increasing-cost industry

An industry for which costs of production rise as output is expanded. In these industries, even in the long run, higher market prices will be needed to induce firms to expand total output. As a result, the long-run market supply curve in these industries will slope upward to the right. The long run market-supply curve for the product will therefore slope upward to the right.

constant-cost industry

An industry for which factor prices and costs of production remain constant as market output is expanded. The long-run market supply curve is therefore horizontal in these industries. The long run market-supply curve will be horizontal or perfectly elastic.

Fixed Cost

Cost of a business that is the bare minimum. Only what you pay when it is shut down.

Variable Cost

Costs that are needed to actually run the business when it is running and not shut down.

Price Searcher

Firms that face a downward-sloping demand curve for their product. The amount the firm is able to sell is inversely related to the price it charges.

Marginal product and average product curves always intersect at the _______ of the _______ curve.

Maximum of the average product curve.

Barriers to entry

Obstacles that limit the freedom of potential rivals to enter and compete in an industry or market.

The profit of the price taker is maximized at the output rate at which __________.

P=MR=MC

Competition as a dynamic process

Rivalry or competitiveness between or among parties (for example, producers or input suppliers) to deliver a better deal to buyers in terms of quality, price, and product information.

Price takers

Sellers who must take the market price in order to sell their product. Because each price taker's output is small relative to the total market, price takers can sell all their output at the market price, but they are unable to sell any of their output at a price higher than the market price.

The firms marginal cost curve is also its _______.

Supply Curve

Marginal Revenue (MR)

The incremental change in total revenue derived from the sale of one additional unit of a product. MR = Change in total revenue/change in output Because the price taker sells all units at the same price, its marginal revenue will be equal to the market price.

A firm that is a price taker faces a __________ demand.

perfectly elastic