Chapter 7
Total Profit
(Price-ATC) x Q. ATC=AFC+AVC; AFC=TFC/Q
Profit per unit
(Price-ATC). ATC=AFC+AVC; AFC=TFC/Q
Perfect competition
*easy entry and exit *producers are price takers (no control over prices) *standardized product *large number of buyers and sellers
Long-run equilibrium
*firm realizes normal profits *removes incentives for firms to enter or exit market
Monopolistically competitive firms
*not productively efficient in the long run *produce where MR=MC *charge consumers on demand curve on MR=MC output *different from other companies in industry *demand curve is downwards sloping *some control over price *easy market entry and exit *close substitutes *the closer the substitutes the more elastic the demand curve *consumers are responsive to price changes
Profit
*price *quantity of output *average total cost
Oligopoly barriers
*pricing strategy *patents *significant cost of capital *economies of scale that may allow only a small number of firms to operate in a market *control of the resources needed to produce output
Oligopoly
*producers who behave strategically when making decisions related to the features, prices and advertising of their products *a few large producers, producers are price makers *extensive entry barriers *either standardized or differentiated products
Mutual interdependence
*situation in which the strategy followed by one producer will likely affect the profits behavior of another producer. *studied using game theory
Graph: profit per unit
MR=MC on demand - ATC
Economic profit
TR minus explicit and implicit cost of production
Nash equilibrium
an outcome in which, unless the players can collude, neither player has an incentive to change strategy
Prisoner's dilemma
each player will peruse a dominant strategy and, as a result, be worse off than if they had not
Economic profit creates
incentives for firms to enter a market
Oligopolistic firms rely on decisions of other firms, deeming oligopoly firms
mutually interdependent
Productive efficiency
produce output at lowest possible total cost per unit of production
Allocative efficiency
producing goods and services that consumers most want where MB=MC
Dominant Strategy
situation in which a particular strategy yields the highest payoff, regardless of the other player's strategy
Collusion
situation in which individuals, firms, or any group of actors coordinate their actions to achieve a desired outcome
Product differentiation
strategy of distinguishing one firm's product from the competing products of other firms
Game Theory
used to study and analyze oligopoly strategies
Graph: economic profit
when MR is above minimum ATC on the demand curve
Graph: loss
when MR is below minimum ATC on demand curve
Graph: normal profit
when MR=MC at the minimum ATC on the demand curve