Chapter 8 - Perfect Competition

P>AVC

Continue to operate

Price Taker

A perfectly competitive firm. A firm that has no influence over the price at which it sells its product.

How price is determined?

Market and demand supply

P<AVC

Shut down

Shape of TR curve and why?

Upward sloping "price takers" and (P x Q) up and up and up

How is a loss located on a curve in a perfectly competitive market?

When TC exceeds TR

Shape of demand curve, that is also perfectly elastic and why?

Won't raise or lower price. (straight line)

P=AVC

indiff

LR= normal profit why?

more suppliers enter into market, bringing back to normal profit

P>ATC

ECO profit (until more suppliers enter into market, bringing back to normal profit)

How is profit located on a curve in a perfectly competitive market?

Dist between TC and TR

2 ways a perfectly competitive firm maximize economic profit?

1. TC and TR (measure the dist between the curves) multiply AP and Q sold 2. MR = MC

4 characteristics of a perfectly competitive market

1. many buyers and sellers 2. firms sell a commodity (such a product doesn't differ across suppliers) 3. fully informed about price and availability of all resources and products. 4. firms and resources are freely mobile

P=ATC

Break even, normal profit

P=D=AR=MR

If P= $10, AR= $10, MR= $10

Marginal Cost

change in TC from PRODUCING another unit of output

Marginal Revenue

change in TR from SELLING another unit of output