chapter 12
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.
Perfect competition is characterized by all of the following except
heavy advertising by individual sellers.
Max Shreck, an accountant, quit his $80,000-a-year job and bought an existing tattoo parlor from its previous owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of $4,000. The lease
is a fixed cost of operating the tattoo parlor.
What conditions make a market perfectly competitive? A market is perfectly competitive if
it has many buyers and many sellers, all of whom are selling identical products, with no barriers to new firms entering the market
Price taker
A buyer or seller that is unable to affect the market price. Because farmer Smith is a price taker, he can sell as many baskets of apples as he chooses at the market pricelong dash—but he can't sell any apples at all at a higher price.
Long-run supply curve:
A curve that shows the relationship between market price and the quantity supplied.
Allocative efficiency:
A state of the economy in which production represents consumer preferences.
Average revenue (AR)
Average revenue is total revenue divided by the quantity of the product sold: AR=TR/Q
Long-run equilibrium:
The situation in which the entry and exit of firms has resulted in the typical firm breaking even.
Profits and losses:
If P < ATC, then a firm will experience losses.
Profits and losses:
If P = ATC, then a firm will break even.
Profits and losses:
If P > ATC, then a firm will make a profit.
Perfect competition
In perfectly competitive markets, firms are price takerslong dash—they accept the market price as given, but not fixed. That is, events in the market (a change in demand or a change in supply) might change market price, but the individual buyer or seller is unable to affect the market price.
Marginal revenue (MR)
Marginal revenue is the change in total revenue from selling one more unit of a product. More formally, it is the change in total revenue that results from a one-unit change in quantity, or:
Which of the following is an expression of profit for a perfectly competitive firm? Profit for a perfectly competitive firm can be expressed as
Profit=(P-ATC)x Upper Q(P−ATC)×Q, where P is price, Q is output, and ATC is average total cost.
Entry and exit decisions:
Profits and losses provide signals to firms that lead to entry and exit in the long run.
A firm will break even when
P = ATC
Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this industry?
The market demand curve is downward sloping; the firm's demand curve is a horizontal line.
Productive efficiency
The situation in which a good or service is produced at the lowest possible cost.
Total revenue (TR)
Total revenue equals price multiplied by quantity: TR=P×Q.
Firms that are price takers
are able to sell all their output at the market price.
Suppose the market for cotton is perfectly competitive and that input prices decreasedecrease as the industry expands. Characterize the industry's long-run supply curve. The cotton industry's long-run supply curve will be
downward sloping because the long-run average cost of production will be decreasing
For a firm in a perfectly competitive market, price is
equal to both average revenue and marginal revenue.
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.
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.
The price of a seller's product in perfect competition is determined by
market demand and market supply.
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.
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.
At the profitminus−maximizing level of output for a perfectly competitive firm,
price equals marginal cost.
Does the market system result in allocative 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.
What is the 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.
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.
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.
