2.11.2 perfect competition

Loss minimizing firm Short run: (digram)

- Demand is low so the price is below AC -AR is less than AC

Define Profit maximization rule (diagram)

•To maximize its total economic profits, a firm should produce at a level of output at which its MC equals to its MR. • for perfect competitor, the P=MR, so MC should equal P

What are explicit cost

Wages, interest, rent

What is long run equilibrium state

When all the firms in a perfectly competitive market are breaking even, a market is in its long run equilibrium state. No firms will wish to enter or exit a market in which firms are breaking even

Total losses if continue to operate

(ATC - AR) x Q

Total losses if continue to operate

(ATC - AVC) x Q

Profit-earning firm: short run (diagram)

- AR > AC •it is producing at MC=MR, but the price is greater than average total cost - the firm is earning economic profits - blue area: economic profit

Oligopoly Characteristics

- Few large dominant firms - change in one firms output has significant impact on the market price (price-makers) - products can be identical or differentiated (advertising) - significant barrier to entry

Profit-earning effects

- High demand= high price - absence of entry barriers → new firms will enter the market → increase in supply → decrease in price

allocative efficiency

- Is achieve if a market produces at the quantity where marginal benefits equals marginal cost - when P = MC

profit earning firm: long run

- New firms enter the market → price decreases → marginal revenue decreases to MR = ATC

4 characteristics of market structures

- Number of firms - price making abilities - type of product - entry barriers

Perfect competition diagram

- Price is determined by market supply and demand - price is the firm's MR - raise prices = no output - lower prices = not able to cover costs of production - demand for individual firm's output is perfectly elastic

Lost minimizing firm

- When the price is lower than the average total cost - minimize losses but earns no economic profit at all

Perfect Competition Characteristics

- very large number of firms - firme are so small, it cannot affect price (price takers) - identical products - no barriers to entry and exit

Productive efficiency

-Is achieved when firms produce at their minimum average total cost - firms are using resources to their maximum efficiency - MR = MC

The breaking even firm (diagram)

-Price of its output = the firms minimum average total cost -Covers all its explicit and implicit costs but earns no additional profit earned only a NORMAL PROFIT -No incentive to enter or exit the market

When should a firm continue to operate

AR > AVC

When should a firm shut down

AVC > AR

Break even condition

If AR = ATC

Shut down condition

If AVC > AR

Loss minimizing firm long run (diagram)

No barriers to entry → firms leave the market b minimize losses → supply decreases → price increases

What are implicit costs

Normal profit

What is a normal profit

Normal profit is the implicit, subjective value of each business owner's skill and time. This can vary amongst businesses