Chapter 12 Econ
To maximize economic profit a firm must decide.
1. How to produce at minimum cost 2. What quantity to produce 3. Whether to enter or exit.
Price Taker
A firm that cannot influence the market price because its production is an insignificant part of the total market.
The Demand Curve for the firms product is a horizontal line at the market price, the same as the firms marginal revenue curve.
A horizontal demand curve shows a perfectly elastic demand, so the demand for the firms product is perfectly elastic.
Total Revenue
Equals the price of its output multiplied by the number of units of output sold. (PRICE X QUANTITY)
External Economies
Factors beyond the control of an individual firm that lower the firms costs as the market output increases.
Perfect Competition is a market in which
Many firms sell identical productions to many buyers. There are no restrictions on entry into the market. Established firms have no advantage over new ones. sellers and buyers are well informed about prices.
Law of Supply
Other things remaining the same, the higher the market price of a good, the greater is the quantity supplied of that good.
How perfect competition arises
Perfect competition arises if the minimum efficient scale of a single producer is small relative to the market demand for the good or service.
Economic Loss=
TFC + (AVC-P) * Q
Marginal Revenue
The change in total revenue that results from a one-unit increase in the quantity sold.
Minimum Efficient Scale
The smallest output at which long-run average cost reaches its lowest output.
External Diseconomies
factors outside the control of a firm that raises the firms cost as the market output increases.
Marginal Revenue
is calculated by dividing the change in total revenue by the change in the quantity sold.
A firms Shutdown Point
is the price and quantity at which it is indifferent between producing and shutting down.
A firms cost curves describes the relationship between its
output and costs.
Long- Run market supply curve
shows how the quantity supplied in a market varies as the market price varies after all the possible adjustments have been made, including changes in each firms plant and the number of firms in the market.
Short-Run Market Supply Curve
shows the quantity supplied by all the firms in the market at each price when each firms plant and the number of firms remain the same.