Econ: Ch. 12 (Final)

Price Taker

A buyer or seller that is unable to affect the market price

Profit Expressed in Terms of ATC

Profit = (P - ATC) X Q

Long-Run Average Cost Curve

Shows the longest cost at which a firm is able to produce a given quantity of output in the long run So, we would expect that in the long run, competition drives the market price to the minimum point on the typical firm's long-run average cost curve

The firm's marginal cost curve is its

Supply curve only for prices at or above average variable cost

Average Revenue (AR)

Total revenue divided by the quantity of the product sold

Sunk Cost

A cost that has already ben paid and cannot be recovered We assume, as is usually the case, that the firm cannot recover its fixed costs by shutting down If a farmer has take out a loan to buy land, the farmer is legally required to make the monthly loan payment whether he grows any wheat that season or not

Long-Run Supply Curve

A curve that shows the relationship in the long run between market price and the quantity supplied

Even during a temporary shutdown, what must a firm do?

A firm must still pay its fixed cost If the firm has signed a lease for its building, the landlord will expect to receive a monthly rent payment, even if the firm is not producing anything that month. Therefore, if a firm does not produce, it will suffer a loss equal to its fixed costs

Because the position of the long-run supply curve is determined by the minimum point on the typical firm's average total cost curve,

Anything that raises or lowers the costs of the typical firm in the long run will cause the long-run supply curve to shift

How should one treat his/her sunk costs?

As irrelevant to the short-run decision making

A perfectly competitive firm's marginal cost curve is also

The supply curve

Economic Profit

A firm's revenue minus all its costs, implicit and explicit

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

Definition of a Perfectly Competitive Market

A market that meets the conditions of: 1. Many buyers and sellers 2. All firms selling identical products 3. No barriers to new firms entering the market (Number 2 and 3 are very restrictive)

If the price drops below average variable cost, the firm will have

A smaller loss if it shuts down and produces no output

Example of a perfectly competitive market

Farmers' markets

What does the supply curve for a firm tell us?

How many units of a product the firm is willing to sell at any given price The marginal cost curve for a firm in a perfectly competitive market tells us the same thing

When will a firm shut down?

If producing would case it to lose an amount greater than its fixed costs

Decreasing-Cost Industries

Industries with downward-sloping long-run supply curves

Increasing-Cost Industries

Industries with upward-sloping long-run supply curves

What can the market supply curve be derived from?

It can be derived directly from the marginal cost curves of the firms in the market

Shutdown Point

The minimum point on a firm's average variable cost curve; if the price falls below this point, the firm shuts down production in the short run

In the long run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by

The minimum point on the typical firm's average total cost curve

As long as marginal revenue is greater than marginal cost,

The profits are increasing, and the firm wants to continue to expand production

Economic Loss

The situation in which a firm's total revenue is less than its total cost, including all implicit costs As long as price is above average variable cost, she will continue to produce in the short run, even when suffering losses But in the long run, firms will exit an industry if they are unable to cover all their costs

Productive Efficiency

The situation in which a good or service is produced at the lowest possible cost Perfect competition results in productive efficiency

Long-Run Competitive Equilibrium

The situation in which the entry and exit of firms has resulted in the typical firm breaking even

In the short run, a firm experiencing a loss has two choices. What are these two choices?

1. Continue to produce 2. Stop production by shutting down temporarily

There are three possibilities for whether or not a firm will make a profit at the level of output where marginal revenue equals marginal cost. What are these three possibilities?

1. P > ATC, which means the firm makes a profit 2. P = ATC, which means the firm breaks even (its total cost equals its total revenue) 3. P < ATC, which means the firm experiences a loss

What are the three key characteristics in any industry?

1. The number of firms in the industry 2. The similarity of the good or service produced by the firms in the industry 3. The ease with which new firms can enter the industry

What two following conclusions can be drawn in regards to maximizing price?

1. The profit-maximizing level of output is where the difference between total revenue and total cost is the greatest 2. The profit-maximizing level of output is also where marginal revenue equals marginal cost, or MR = MC

Where are optimal decisions made?

At the margin

How is the market demand curve determined?

By adding up the quantity demanded by each consumer in the market at each price

How is the market supply curve determined?

By adding up the quantity supplied by each firm in the market at each price

How can a firm reduce its loss below the amount of its total fixed cost?

By continuing to produce, provided that the total revenue it receives is greater than its variable cost

How are prices in perfectly competitive markets determined?

By the interaction of demand and supply for the good or service

Profit

Difference between the total revenue (TR) and the total cost (TC) - Profit = TR - TC Profit = (P x Q) - TC

What causes firms to exit an industry?

Economic losses

What attracts firms to enter an industry?

Economic profits

For a firm in a perfectly competitive market, price is

Equal to both average revenue and marginal revenue

As long as a firm's total revenue is greater than its variable costs,

It should continue to produce no matter how large or small its fixed costs are

In the long run, unless a firm can cover all its costs,

It will shut down and exit the industry

If a perfectly competitive firm tries to raise its price,

It won't sell anything at all because consumers will switch to buying the product from the firm's competitors

The marginal revenue curve for a perfectly competitive firm is the same as

Its demand curve

We have seen that a firm is experiencing a loss, it will shut down if

Its total revenue is less than its variable cost

Oligopoly Market

Number of Firms: Few Type of Product: Identical or differentiated Ease of Entry: Low Examples of Industries: Manufacturing computers, manufacturing automobiles

Monopolistic Competitive Market

Number of Firms: Many Type of Product: Differentiated Ease of Entry: High Examples of Industries: Clothing stores, restaurants

Perfectly Competitive Market

Number of Firms: Many Type of Product: Identical Ease of Entry: High Examples of Industries: Growing wheat, growing apples

Monopoly Market

Number of Firms: One Type of Product: Unique Ease of Entry: Entry blocked Examples of Industries: First-class mail deliver, tap water

Profit

TR - TC

The marginal cost curve intersects the average variable cost where

The average variable cost curve is at its minimum point

Marginal Revenue (MR)

The change in total revenue from selling one more unit of a product (MR = Change in TR/Change in Q)

What forces down the market price until a typical firm is breaking even?

The entry of firms

The more firms there are in an industry,

The farther to the right the market supply curve is

What happens to any firm that raises the price of its product above the market price?

The firm loses customers to competing firms

Because price equals marginal revenue for a firm in a perfectly competitive market,

The firm will produce where P = MC

For prices below minimum average variable cost,

The firm will shut down, and its output will drop to zero

Marginal Cost

The increase in total cost resulting from producing another unit of output

For any firm, whether total revenue is greater or less than variable costs is

The key to deciding whether to shut down or continue producing in the short run

The demand curve for a perfectly competitive market firm is also a horizontal line at

The market price

For any level of output, a firm's average revenue is always equal to

The market price This equality holds because total revenue equals price times quantity (TR = P x Q) and average revenue equals total revenue divided by quantity (AR = TR/Q)

What is one option that is not available to a firm with losses in a perfectly competitive market?

To raise its price