ECON Ch. 12

In a perfectly competitive market, the long-run price is completely determined by...

the forces of supply

Productive Efficiency

a situation in which a good or service is produced at the lowest possible cost.

How is long-run competitive equilibrium achieved in a perfectly competitive market?

-If firms are making an economic profit, additional firms enter the market, driving down price to the break-even level. -If firms are making an economic loss, existing firms exit the market, driving price up to the break-even level.

Market structures in decreasing order of competitiveness

-Perfectly Competitive Markets -Monopolistically competitive markets -Oligopolies -Monopolies

Rules for profit maximization among all 4 firms

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

Long-run supply curve

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

In an Oligopoly, there are _________ firms, selling _______ products, with a ______ ease of entry.

Few, Identical or differentiated, Low (Ex. Manufacturing computers, manufacturing automobiles)

If MC = MR does not result in a profit, what do you do?

Still use MC = MR, as it will guide towards the loss-minimizing level of output

In a perfectly competitive market, the shutdown point for a firm occurs where...

MR = AVC, so there is no reason to continue production

In a monopolistically competitive market, there are _________ firms, selling _______ products, with a ______ ease of entry.

Many, Differentiated, High (Ex. Clothing stores, Restaurants)

In a perfectly competitive market, there are _________ firms, selling _______ products, with a ______ ease of entry.

Many, Identical, High (Ex. Growing Wheat, Poultry Farming)

The difference between price and average total cost equals:

Marginal profit

Market Structures

Models of how the firms in a market interact with buyers to sell their output.

In the short run, the firm should:

Operate if price > average variable cost.

P > ATC = P = ATC = P < ATC =

Profit Breaking Even Loss (Statements hold true at every level of output)

Economic profit

Revenue minus both explicit and implicit costs

In perfect competition, when a firm is making positive economic profit in the short run, then new firms enter the market causing the market supply curve to __________ and the market price to __________.

Shift right, decrease

Fixed costs are always...

Sunk costs

Profit

TR - TC

Additional profit maximizing rule for perfectly competitive firms

The profit-maximizing level of output is also where P = MC

Long-run competitive equilibrium

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

Price-Takers

Unable to affect the market price (perfectly competitive firms)

For a firm in a perfectly competitive market, price is equal to...

both average revenue and marginal revenue

Long-run equilibrium in perfect competition results in:

both productive and allocative efficiency

Marginal Revenue (MR)

change in total revenue from selling one more unit of a product

In a perfectly competitive market, the _________________ determine the market supply curve

collective actions of the individual firms

Allocative Efficiency

is a state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. a state in which the economy produces the best combination of consumer preferences.

In a perfectly competitive market, the supply curve of the individual firm is the...

marginal cost curve

Perfectly Competitive Market

one in which -There are many buyers and sellers; -All firms sell identical products; and -There are no barriers to new firms entering the market.

In a monopoly, there are _________ firms, selling _______ products, with a ______ ease of entry.

one, unique, entry blocked (Ex: First-class mail delivery, providing tap water)

A perfectly competitive firm is too...

small to affect the market price

Average Revenue (AR)

total revenue --------------- quantity sold

In the long run, all costs are...

variable

If we show total revenue and total cost on the same graph, the ___________________ is the profit the firm makes.

vertical difference between the two curves