Ch 12

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In the long run, a competitive firm makes

zero economic profit

If the market price is $40 in a perfectly competitive market, the marginal revenue from selling the fifth unit is

$40 in a perfectly competitive market, each additional unit brings the same revenue

Oligopoly

1. Few Firms 2. Identical or differentiated products 3. Low Ease of Entry Ex; Manufacturing computers Manufacturing Automobiles (Factories)

Monopolistic Competition

1. Many Firms 2. Differentiated Products 3. High ease of entry Ex; Clothing Stores, Resturants (Entertainment)

Perfect competition

1. Many Firms 2. Identical Products 3. High Ease of Entry Examples: Agricultural Markets (Farm Foods)

Monopoly

1. One Firm 2. Unique Products 3. Entry blocked Ex; First class mail delivery, Tap water (Necessities)

What are the rules for Profit maximization?

1. The profit maximizing level of output is where the difference between total revenue and total cost is greatest 2. The profit maximizing level of output is also where Marginal Revenue = Marginal Cost

For perfectly Competitive firms, a additional rule can be added to Profit Maximization, it is

3. The profit maximizing level of output is also where P = MC

The delivery of First class mail by the US postal service is an example of

A monopoly

The long run supply curve is horizontal where

ATC has its minimum point

Total Cost =

ATC*Quantity (Average total cost)

In the long run, a firm in a perfectly competitive industry will supply output only if its total revenue covers its

Explicit plus its implicit costs

If P = ATC

Firm is breaking even

If P < ATC

Firm is making a loss

Some Markets have many buyers and sellers but fall into the category of monopolistic competition rather than perfect competition. The most common reason for this is

Firms in these markets do not sell identical products

If a peanut shoppe suffers a short run loss, it will not choose to shut down if

His total revenue exceeds his variable cost

How exactly do you find where the horizontal demand curve will be?

Look at the Supply and Demand lines and find where they intersect. That price will be where the demand line sits. So if the S and D lines cross at $4, then the demand curve will sit on $4 and no one will accept a different price.

Shutdown point is where

MC = AVC

Total Variable Cost is where Total fixed Cost is where

P * Q where MC = AVC Price Straight till you reach the ATC) - (Price where MC = AVC) * Q

Profit per unit is

P - ATC

For a firm to make no economic profit then

P = MC = ATC

Perfectly Competitive firms are also

Perfect competitors

In simpler terms, A firm should produce 0 units of output if

Price < AVC

Perfectly Competitive firms in a perfectly competitive market are

Price takers

Profit (Total Profit) =

Profit = (P - ATC) *Q

Equation for Profit

Profit = Total Revenue - Total Cost

How to figure out revenue for a perfectly competitive firm

Since the firm receives the same amount of money for every unity of out put it sells Price = Average Revenue = Marginal Revenue

Why do Perfect Competitors face a horizontal demand curve?

Since there are thousands of other firms, their collective supply combined with the overall market determines the price of the product.

Why are Perfectly Competitive firms Price Takers?

They are unable to affect the market price. This is because they are tiny relative to the market, and sell exactly the same product as everyone else.

A firm should only produce nothing if

Total Revenue < Variable Cost (P * Q) < VC P < AVC

A firm has to charge the same price as every other firm in the market. Therefore, the firm

is a price taker

The rules of Profit Maximization apply to

every firm

If P > ATC

firm is making a profit

Price takers

have to charge the same price as every other firm in the market

When more firms enter a market supply increases and this leads to

lower prices that the firm can receive for its output and therefore lower a typical firm's economic profit

Total Revenue =

price * quantity

Productive Efficiency is a situation in which a good or service is

produced at the lowest possible cost

Allocative Efficiency is a state of the economy in which

production represents consumer preferences

Perfectly competitive markets are both

productively and allocatively efficient

In the short run, a firm that is operating at a loss has two options

shut down, or continue to produce

If a firm shuts down in the short run it will

suffer a loss equal to its fixed costs

In the short run, fixed costs are

sunk costs

The marginal cost curve above AVC is the

supply curve for the individual firm in the short run

In the long run,

the market will supply and demand by consumers at a price equal to the minimum point of the ATC curve

Firms will continue to join a market, increasing supply, until

there is no incentive for further firms to enter the market because the firms make no economic profit.


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