Unit 3: Perfect Competition
Decreasing Cost Industry
Entry of new firms shifts the cost curves for all firms downward
Increasing Cost Industry
Entry of new firms shifts the cost curves for all firms upward.
Examples of Monopolies
-Public companies: Natural Gas, Electric, Water -Near Monopolies: Intel, DeBeers Diamond Co.
Profit Maximizing Rule
All firms maximize profit by producing where MR = MC. Rule only applies if price is above AVC. Rule can be restated P=MC for Perfectly Competitive Markets (because MR=P)
Normal Profit
Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources.
Examples of Monopolistic Competition
Apartments, Books, Bottled Water, Clothing, Fast Food, Night Clubs
Constant Cost Industry
Entry (or exit) of firms does not shift the cost curves of firms in the industry.
Oligopoly Characteristics
Few large Producer (3-12) High barriers to entry/exit Product identical or different Control over Price Mutual Interdependence
Perfect Competition Characteristics
Homogeneous goods Firms are price takers Many buyers and sellers No barriers to entry/exit Firms profit maximize
Monopolistic Competition Characteristics
Many sellers, product differentiation, free entry and exit
Monopoly Characteristics
One single firm Unique products Firms are price makers High barriers to entry/exit Imperfect information Firms profit maximize
Allocative Efficiency
Producing at the amount most desired by society (allocating resources towards the products society wants) Graphically it is where price equals marginal cost
Productive Efficiency
Producing at the lowest possible cost (minimum amount of resources are being used). Producing at the lowest possible cost (minimum amount of resources are being used) (ONLY IN THE LONG RUN)
Per Unit Tax
Tax or subsidy is effects the VARIABLE COSTS so MC, AVC, and ATC will shift. This WILL effect the quantity produced
Lump Sum Tax
Tax or subsidy only effects FIXED COSTS so only AFC and ATC will shift. MC stays the same. This WILL effect the quantity produced
Break-even Point (BEP)
The output where ATC is minimized and economic profit is zero.
Shutdown Point
The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run.
Example of Perfect Competition
agriculture
Examples of Oligopoly
cereal, cell phone, film industries
Perfectly Competitive Long-Run Equilibrium
occurs when there is no more incentive for firms to enter or exit. P = MR=MC=Minimum ATC and Profit=0.