Ch. 8: The Competitive Firm

The determinants of a firm's supply include:

-Price of factor inputs -Technology -Expectations -Taxes and subsidies ****All shift the MC upward or downward

In the long-run, firms must cover: In the short-run, firms continue to operate as long as:

-all costs, explicit and implicit or exit the industry (investment decision) -it's variable costs are covered

Perfectly Competitive Industry Characteristics:

1. Many firms - Lots of firms are competing for consumer purchases 2. Identical products - The products of the different firms are identical, or nearly so 3. Low entry barriers - Its relatively easy to get into the business

Monopoly

A firm that produces the entire market supply of a particular good or service

Perfect Compeition

A market in which no buyer or seller has market power

Firm vs Industry or Market

A market or industry consists of all firms operating in that type of business

Explicit Cost

A payment made for the use of a resource

The total revenue curve of a perfectly competitive firm is:

An upward sloping straight line

If a perfectly competitive firm wanted to maximize its total revenues, it would produce:

As much output as it is capable of

Where price doesn't cover average variable costs at any rate of output, production should:

Cease

Variable Costs

Costs of production that change when the rate of output is altered, such as labor and material costs

Fixed Costs

Costs of production that don't change when the rate of output is altered, such as the cost of basic plants and equipment

The market demand curve for a product is always:

Downward sloping (law of demand)

Shutdown Decision

Firms should shutdown only if total revenues < total variable costs If price drops below (or is equal to AVC), firm should shut down If total losses exceed total fixed cost by continuing production, he should cease production

Competitive Firm

Firms that have no market power

A firm's demand curve is perfectly ________ while market demand curve is _____________ _________________

Flat/Downward Sloping (law of demand)

The demand curve confronting a perfectly competitive firm is:

Horizontal (perfectly elastic)

Three possible scenarios for MC and price:

MC > p ---> If MC exceeds price, we are spending more to produce the extra unit than we're getting back: total profits will decline if we produce it p > MC ---> If an extra unit it bringing in more revenue than it costs to produce, it is adding to total profit. A competitive firm wants to expand rate of product whenever price exceeds MC p = MC ---> For perfectly competitive firms, profits are maximized at the rate of output where price equals marginal cost

Payroll taxes increase:

Marginal cost

For perfectly competitive firms, price equals:

Marginal revenue

Demand curve is:

Marginal revenue curve

Market equilibrium occurs when:

Marker supply crosses market demand

When price exceeds average variable cost but not average total cost, the profit maximization rule:

Minimizes losses

Various degrees of competition and different types of markets:

Perfect competition to imperfect competition and monopoly

Profit per Unit =

Price - ATC

Revenue =

Price x Quantity

If price exceeds average variable cost but is less than average total cost, a firm should, in the short run:

Produce at rate where price (MR) = MC

Profit Maximization

Produce at that rate or output where marginal revenue (p) equals marginal cost

Taxes affect average total cost and marginal cost curves as follows:

Profit taxes: affect neither Property taxes: affect only average total cost Payroll taxes: affect both average and marginal costs

Shutdown decision is a _______ _____ response

Short-run

The marginal cost curve is the:

Short-run supply curve for a competitive firm that lies above the average variable cost curve

Total Profits =

TR-TC and (p-ATC) x q --> Do from curve on graph

Price Takers

Take the price that the market sets

Market Power

The ability to alter the market price of a good or service

Marginal Revenue

The change in total revenue that results from one-unit increase in the quantity sold = Change in total revenue/Change in output

Investment Decision

The decision to build, buy, or lease plants and equipment; to enter or exit an industry -Long-run decision

Economic Profit

The difference between total revenues and total economic costs

Marginal Cost

The increase in total costs associated with a one-unit increase in production

Market Structure

The number and relative size of firms in an industry

Normal Profit

The opportunity cost of capital; zero economic profit -Normal rate of return

Shutdown Point

The rate of output where price equals minimum AVC

Production Decision

The selection of the short-run rate of output (with existing plants and equipment)

Economic Cost

The value of all resources used to produce a good or service; opportunity cost

Implicit Cost

The value of resources used, for which no direct payment is made

A perfectly competitive firm is one....

Whose output is so small in relation to market volume that its output decision have to perceptible impact on price

Profit

the difference between total revenue and total cost

Economic Profit =

total revenue - total economic cost (explicit costs + implicit costs)

Accounting Profit =

total revenue - total explicit costs