ECON 2106 - CH 12 & 13 "Final Material"

Réussis tes devoirs et examens dès maintenant avec Quizwiz!

4 Short Run Cases

1) Profit - Earn an Econ Profit 2) Break-Even 3)Incur a Large Loss (Shut-Down Case) 4) Incur a small loss (stay-open case)

The Firm's Supply Curve

A Firm's Supply Curve is derived from the Marginal Cost and Average Variable Cost with Market Prices on Y-axis and Quantity on X-Axis.

Price Takers

A Price Taker is a firm that cannot influence the market price because its production is an insignificant part of the total market.

The Shutdown Point

A firm's shut down point is the price and quantity at which it is indifferent between producing and shutting down. The shutdown point occurs at the price and quantity at which average variable cost is a minimum. At the shutdown point, the firm is minimizing its loss and its loss equals total fixed costs.

What is the Total Fixed Cost (TFC)

ATC - AVC Ave. Total Cost - Ave. Variable Cost

Total Variable Cost =

Average Variable Cost (AVC) x Quantity Produced

How does the firm maximize its profit in the short run? Why is this the case?

By producing at a quantity where the Marginal Revenue (MR) = Marginal Cost (MC); because the firm has produced ALL of the profitable units

Incur a loss (Cases 3 & 4) "Need To"

Compute: (ATC-AVC)*Q & (ATC-P)*Q Compare Both and see which is best option (least amt of $ loss)

What is a price taker?

Each firm in a perfectly competitive firm is a price taker, meaning they cannot influence the market price

Economic Loss

Economic Loss = Total Fixed Cost (TFC) + Total Variable Cost - Total Revenue

Entry and Exit

Firms respond to economic profit and economic losss by either entering or exiting a market.

Case 3) Large Loss(Shut Down) - Still have to pay ?

Fixed Costs (e.g. rent) even if they stop producing

When do firms in a competitive market make a short-run economic profit?

If demand increases

Economic Profit (or Loss)

In short-run equilibrium, although the firm produces the profit-maximizing output, it can end up making an economic profit, economic loss, or break even.

If demand for a good decreases, what happens to the price in the short run?

It falls, and, as long as the price remains above the firm's average cost, each firms produces less output

What does the market demand curve in a perfectly competitive industry look like?

It slopes downward

LRAC Curve

Long Run Average Cost Curve

Minimum Efficient Scale

Lowest Level of Output a firm can produce & have LRAC at its smallest possible value

What does a perfectly competitive firm's supply curve look like?

MC above the minimum AVC

P =

MR

Marginal Revenue (MR) formula

MR = (change in TR) / (change in Q)

Characteristics of PERFECT COMPETITION

Many Firms Identical Product Price Taker No Restrictions on entry into the market

Marginal Revenue

Marginal Revenue is the change in total revenue that results from a one-unit increase in quantity sold. In perfect competition, the firm's Marginal Revenue is equal to the market price.

MES

Minimum Efficient Scale

At the efficient quantity, do the total producer surplus and the total consumer surplus have to equal each other?

No, they do not.

If demand increases, do long-term firms make an economic profit?

No, they do not.

What does MR always equal in a perfectly competitive firm?

P

What is a shutdown point? What results from this?

P = AVC: the price and quantity at which the firm is indifferent between producing and shutting down; zero economic profit or break even

Firm SR Supply Curve

P must exceed Min AVC Output where P = MC or MR=MC "if it doesn't you are going into (shut-down) no output"

How Do Perfect Competitions Arise?

Perfect competition arises if the minimum efficient scale of a single produce is small relative to the market demand for the good or service.

Profit Break-even Case formula

Pie = (P-ATC)*Q

Total Revenue =

Price (P) x Quantity (Q)

What does price equal in perfect competition?

Price equals marginal revenue

Marginal Revenue =

Profit

Where do perfectly competitive firms in the long run produce?

at the minimum ATC

What happens to a market when firms are incurring persistent economic losses?

Some firms exit and the price rises

Economic Loss =

TFC + Q(AVC - P)

Two Methods of attaining Econ Profit

TR-TC Approach & MR-MC Approach

TR-TC is Maximized when

The Vertical Distance between the TR & TC curves is Maximized

Economic Profit

The difference from Accounting Profit is you include *"IMPLICIT COSTS" * in Econ Profit

Demand for the Firm's Product

The firm can sell any quantity it chooses at the market price. So the demand cue for the firm's product is a horizontal line at the market price, the same as the firm's marginal revenue curve. The demand for this particular firm's product is thus perfectly elastic and a perfect substitute for any other product in that firm's market.

The Firm's Decision

The goal of the competitive firm is to maximize economic profit, given the constraints it faces. To achieve its goal a firm must decide:

Short-Run

The short run is a situation in which the number of firms is fixed.

Total Revenue

Total Revenue = Price x Quantity Sold

On a graph, at what point is the output made?

When MC=MR

(MR>MC)

When Marginal Revenue exceeds Marginal Cost, profit occurs with one more unit of production and loss occurs with one less unit of production.

(MR=MC)

When Marginal Revenue is equal to Marginal Cost, economic profit is maximized and either an increase or a decrease in production decreases economic profit

(MR<MC)

When Marginal Revenue is less than Marginal Cost, profit occurs with one less unit of production and loss occurs with one more unit of production

Long-Run Quilibrium

When economic profit and economic loss have been eliminated and entry and exit have stopped, a competitive market is in long-run equilibrium.

Where do firms make an economic profit?

When the MR > ATC

When are resources used efficiently?

When we produce the goods and services people value most highly

MR - MC Approach (Profit Max at the point)

Where the MC curve intersects the MR curve from below

Do firms usually stay in a market whenever they cannot make an economic profit?

Yes, they usually stay in if they can break even

What kind of profit do perfectly competitive firms make in the long-run?

Zero Economic Profit

Total revenue

equals the price x units sold

What does the demand curve for a firm in perfect competition look like?

it is horizontal

In the long-run equilibrium in a perfectly competitive market, the firms produce at the ______ possible average total cost and the price equals the ______ possible average total cost.

lowest; lowest

In the short run, after an increase in demand firms _______ in the long run, after an increase in demand firms_______.

make an economic profit; make zero economic profit

What are factors that make up perfect competition?

many firms, same products, many buyers, no restrictions, no advantages for existing firms, and all buyers and sellers are well informed about prices

If firms in a market are incurring an economic loss, then as some exit, the price _____ and the surviving firms' economic losses_______.

rises; becomes smaller

Short-run market supply curve; what shape does it take?

shows the quantity supplies by all the firms in the market at each price when each firm's plant and the number of firms remains the same (the sum of the amounts supplied by each firm in the market at that price); it slopes upward

Marginal Revenue (MR)

the change in total revenue from a one-unit increase in the quantity sold (additional revenue)

What happens if P > AVC? What results from this?

the firm continues to product; economic profit

What happens if P < AVC? What results from this?

the firm shuts down; economic loss

What happens if the price is less than the firm's minimum ATC?

the firm suffers an economic loss

What happens with technological advances?

the firms' costs are lowered and their supply increases, firms that do not adapt the new technology incur economic losses, all firms make zero economic profit

What do consumers pay in a perfectly competitive market in the long run?

the lowest possible price that allows the firms to earn zero economic profit

What happens with a decrease in demand?

the price is initially lowered, some firms leave the market, and the price eventually rises to eliminate economic losses

What happens with an increase in demand?

the price is initially raised, new firms enter the market, and the price eventually falls to eliminate economic profit

What happens to market supply when a firm enters a market?

the supply increases

Why do firms continue to operate at zero economic profit?

they are still earning a normal profit and therefore they are earning the same profit that they could be earning elsewhere

What does a perfectly competitive's firm's supply curve look like for prices below the minimum average variable cost?

vertical at zero output

When does an efficient use of resources occur?

when making on person better off must make someone else worse off

What is the efficient level of output?

when the marginal social cost = marginal social benefit

When does perfect competition occur?

when the minimum efficient scale of a firm is small relative to demand

When will new firms want to enter a market?

when the new firms can make an economic profit


Ensembles d'études connexes

MKT 3050 Quiz Questions Chapters 1-14

View Set

Erikson's Theory of Psychosocial Development and 8 stages

View Set