Unit 3: Perfect Competition

Decreasing Cost Industry

Entry of new firms shifts the cost curves for all firms downward

Increasing Cost Industry

Entry of new firms shifts the cost curves for all firms upward.

Examples of Monopolies

-Public companies: Natural Gas, Electric, Water -Near Monopolies: Intel, DeBeers Diamond Co.

Profit Maximizing Rule

All firms maximize profit by producing where MR = MC. Rule only applies if price is above AVC. Rule can be restated P=MC for Perfectly Competitive Markets (because MR=P)

Normal Profit

Another way of saying that firms are earning zero economic profits or a fair rate of return on invested resources.

Examples of Monopolistic Competition

Apartments, Books, Bottled Water, Clothing, Fast Food, Night Clubs

Constant Cost Industry

Entry (or exit) of firms does not shift the cost curves of firms in the industry.

Oligopoly Characteristics

Few large Producer (3-12) High barriers to entry/exit Product identical or different Control over Price Mutual Interdependence

Perfect Competition Characteristics

Homogeneous goods Firms are price takers Many buyers and sellers No barriers to entry/exit Firms profit maximize

Monopolistic Competition Characteristics

Many sellers, product differentiation, free entry and exit

Monopoly Characteristics

One single firm Unique products Firms are price makers High barriers to entry/exit Imperfect information Firms profit maximize

Allocative Efficiency

Producing at the amount most desired by society (allocating resources towards the products society wants) Graphically it is where price equals marginal cost

Productive Efficiency

Producing at the lowest possible cost (minimum amount of resources are being used). Producing at the lowest possible cost (minimum amount of resources are being used) (ONLY IN THE LONG RUN)

Per Unit Tax

Tax or subsidy is effects the VARIABLE COSTS so MC, AVC, and ATC will shift. This WILL effect the quantity produced

Lump Sum Tax

Tax or subsidy only effects FIXED COSTS so only AFC and ATC will shift. MC stays the same. This WILL effect the quantity produced

Break-even Point (BEP)

The output where ATC is minimized and economic profit is zero.

Shutdown Point

The output where AVC is minimized. If the price falls below this point, the firm chooses to shut down or produce zero units in the short run.

Example of Perfect Competition

agriculture

Examples of Oligopoly

cereal, cell phone, film industries

Perfectly Competitive Long-Run Equilibrium

occurs when there is no more incentive for firms to enter or exit. P = MR=MC=Minimum ATC and Profit=0.