economics- perfect competition

PRODUCTION/SHUTDOWN RULE

-produce at a loss if... average variable cost = or < price < average total cost -shut down if... price < average variable cost

PROFIT-MAXIMIZING RULE

Produce at the quantity at which Marginal Revenue (MR) = Marginal Cost (MC)

total revenue formula

price X quantity

PROFIT (IN TERMS OF PRICE, AVERAGE TOTAL COST, AND OUTPUT)

profit (π) = profit per unit X output - if π > 0, firm generates economic profit - if π = 0, firm generates normal profit - if π < 0, firm generates a loss

profit per unit

profit per unit = price - average total cost

marginal cost formula

MC= Change in total cost/ change in output

average total cost

ATC = average fixed cost + average variable cost

constant-cost industry

An industry in which the firms' cost structures do not vary with changes in production.

productive efficiency

Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.

allocative efficiency

Producing the goods and services that are most wanted by consumers in such a way that their marginal benefit equals their marginal cost.

average revenue (AR)

Revenue per unit sold, equal to total revenue divided by the quantity of output produced and sold.

marginal revenue (MR)

The change in a firm's total revenue that results from a 1-unit change in output produced and sold.

normal profit

The level of profit that occurs when total revenue is equal to total cost. This level indicates that a firm is doing just as well as it would have if it had chosen to use its resources to produce a different product or compete in a different industry. Normal profit is also known as zero economic profit.

economic profit

The level of profit that occurs when total revenue is greater than total cost.

loss

The level of profit that occurs when total revenue is less than total cost

shutdown point

The price below which a firm will choose not to operate in the short run. Numerically, this point occurs when marginal revenue equals marginal cost at the minimum average variable cost. Graphically, this point occurs where the price, or marginal revenue curve, intersects the marginal cost curve at the minimum point of the average variable cost curve (AVC).

long-run equilibrium

A market condition in which firms do not face incentives to enter or exit the market and firms earn a normal profit. Generally, it occurs when the market price is equal to the minimum average total cost faced by firms.

perfect competition

A market structure characterized by the interaction of large numbers of buyers and sellers, in which the sellers produce a standardized, or homogeneous, product. These sellers are price takers, can sell as much output as they choose to produce at the market price, and have the ability to easily enter or exit an industry.

long-run supply curve

A supply curve that represents the long-run relationship between price and quantity supplied.

short-run supply curve

A supply curve that represents the short-run relationship between price and quantity supplied. For a perfectly competitive firm, the portion of the marginal cost curve that is at or above the minimum point of the average variable cost curve.

price takers

Firms that take or accept the market price and have no ability to influence that price.

average fixed cost formula

average fixed cost = average total cost - average variable cost

marginal revenue formula

change in Total Revenue/change in quantity

profit maximizing rule

produce at the quantity at which marginal revenue=marginal cost

PROFIT (IN TERMS OF TOTAL REVENUE AND TOTAL COST)

profit (π)= total revenue - total cost/ouput - if π > 0, firm generates economic profit - if π = 0, firm generates normal profit - if π< 0, firm generates a loss

average revenue formula

total revenue/ quantity