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