Chapter 13

Long run

Firms enter and exit the market and neither economic profits nor losses are possible, aka zero economic profit.

TR

# units sold x market price.

Increasing-cost industry

Factor prices rise as more firms enter the market and existing firms expand produciton

Competition

1. Competition as a process 2. Perfectly competitive market structure

Determining profit from a graph

1. Find output where MC=MR. Determines the quantity the firm will produce if it wants to maximize profits. 2. Find profit per unit where MC=MR. Drop a line from this point to the x axis. Then, where this line touches ATC, draw a horizontal line to the y axis, which tells us the ATCs per unit. This should create a rectangle, or none if ATC touches MC=MR (zero profit), which should determine a loss or profit.

LR Equilibrium

1. In LR Equilibrium, zero profit is being made. 2. The long-run supply curve is more elastic than the short-run supply curve. Because output changes are much less costly in the long run than in the short run.

Analysis of the competitive firm

1. Short run analysis (already presented) 2. Long run analysis

Price taker

A firm or individual who takes the price determined by market supply and demand as given

Perfectly competitive market

A market in which economic forces operate unimpeded. 1. Both buyers and seller are price takers 2. Large number of firms 3. No barriers to entry 4. Firms' products are identical 5. Complete information 6. Selling firms are profit-maximizing entrepreneurial firms.

How to move form Firm supply to industry supply

Add the quantities all firms will supply at each possible price. SInce all firms in a competitive market have identical MC curves, a quick way of summing the quantities is to multiply the quantities fromm the MC curve of a representative firm at each price by the number of firms in the market. Also, as number of firms enter, in long run, the supply increases and vice versa.

Loss-minimizing condition

Also MC=MR=P

Why firms dont shutdown during a profit loss

Because of fixed costs. In the short run, a firm knows the fixed costs are sunk costs it must pay regardless of whether or not ir produces. The firm considers only the costs it can save by stopping production, and those are the variable costs. As long as a firm is covering its variable costs, it pays to keep producing. If the firm stopped producing, the loss would be much greater because no money would be made.

Marginal Revenue (MR)

Change in total revenue associated with a change in quantity. Since a perfect competitor accepts the market price as given, marginal revenue is simply the market price. MR=P. MR is normally pretty constant in perfect competition.

TC

Cumulative sum of MCs + a fixed cost

Profit in response to change in output

Determined by MC and MR

Price for firm in perfect competition

Determined by the market, and the firm takes what it can get. Means that firms will increase their output in response to an increase in market demand even though that increase in output will cause the market price to fall and can make all firms collectively worse off. Firms only act in self-interest though.

Why can't firms earn economic profit/loss in the long run?

Entry and exit of firms. If there are economic profits, firms will enter market which will shift the market supply curve to the right. As market supply increases, the market price will decline and reduce profits for each firm. Firms will continue to enter the market and he market price will continue to decline until the incentive of economic profits is eliminated.

Decreasing-cost industry

Factor prices fall as industry output expands

A vastly superior firm (more workers, better machinery) will still earn zero economic profit in the long run

Happens because other firms will compete to have this too.

Market supply curve

Horizontal sum of all the firms' marginal cost curves, taking into account of any changed in input prices that might occur. (in the short run when the number of firms in the market is fixed). Used to determine an industry's supply

Normal profit

If an entrepreneur receives this, or his opportunity cost, then he/she will likely stay in the business since entrepreneurs are just an input in production like any other factor.

Alt. method of determining profit-maximizing level of output

Look at the TR and TC curves.

Profit-maximizing condition

MC=MR=P. Not necessarily a position that minimizes either average variable cost or average total cost.

Constant-cost industry

Market where factor prices do not increase as industry output increases

Goal of firms

Maximize profits

Maximizing Profit

Means maxing total profit, not per unit profit. Profit-maximizing firms don't care about profit per unit; as long as an increase in output will increase total profits.

In the long run

More of the adjustment is done by quantity

Industry demand (not firm demand)

Normal downward sloping

Short run

Number of firms is fixed and the firm can either earn economic profit or incur economic loss

Demand curve for firm in perfect competition

Perfectly elastic since the firm is so small in a perfectly competitive market. Each individual firm in a competitive industry is so small that it perceives that its actions will not affect the price it can get for its product.

Shutdown point

Point at which P=AVC. Price falls below AVC, the firm's loss would be more than all of the fixed costs and it would do better to simply stop producing temporarily and avoid paying the variable cost. When price falls below shutdown, the AVC the firm can avoid paying by shutting down exceeds the price it would get for selling the goods.

In the short run

Price does more of the adjusting

MR=MC

Profit maximization As long as MC<MR, increase production because you can keep increasing profit. Stop when MC>MR because that means it is more expensive to product something than to sell it. MR=MC because you have gotten to the point where selling something is just s expensive as making something, thus you have gotten all of the previous profit from the points where MR>MC, it has all added up.

Competition as a process

Rivalry among firms and is prevalent throughout our economy. One firm tries to take market share away form other firms.

Long run market supply curve

Schedule of quantities supplied when firms are no longer entering or exiting the market. Occurs when firms are earning zero profits. Horizontal because factor prices are constant and there are constant returns to scale. That is, factor prices do not increase as industry output increases. Determined on a S & D graph by connecting the intersecting points of the original S &D and the new S & D, usually creates a horizontal line.

Barriers to entry

Social, political, or economic impediments that prevent firms from entering the market. Patents, processes, technological, bankers lend money to only white people, etc.

Firms products are identical

Speaks for itself, necessary for perfect competition. Not like Coke v Pepsi, more like a corn kernel from one farm in Indiana vs another farm in Indiana.

Profit

TR-TC

Total profit

TR-TC

MC for a firm in perfect comp

The MC curve is also the firm's supply curve. Tells how much a competitive firm should produce at a given point. Read like: If the price was P, the firm would produce Q. More specifically, MC above AVC is the supply curve.

Marginal cost (MC)

The change in total cost associated with a change in quantity. Movements form one quantity to another.