Micro - Perfect Competition
Pete's Electronics is a small company that produces 8 gigabyte flash drives in a perfectly competitive market. The market price for 8 gigabyte flash drives is $15 each. a. Complete the table below with the total revenue (TR), marginal revenue (MR), and average revenue (AR) for Pete's Electronics.
$ $ $ 10 150 15 15 20 300 15 15 30 450 15 15 40 600 15 15 50 750 15 15 60 900 15 15
Bobby decides to sell lemonade on a hot summer day. If Bobby sells 20 glasses of lemonade for $0.20 per cup, and his average total cost is $0.17, what are Bobby's economic profits for the day?
$0.60
Soylent Green is a perfectly competitive firm that produces soybeans. According to the graph, what is Soylent Green's marginal revenue for an extra bushel of soybeans sold?
$50 for an extra bushel of soybeans sold
because the marginal revenue faces by the firms is equal to price, ______ revenue is also equal to price
Average
total revenue mins the ______ and ____ cost of production is economic profit
Explicit; implicit
What are the likely reason(s) that the market for electricity is not perfectly competitive?
It is difficult to enter or exit the industry as a supplier There are few sellers in the market
FORMULA: Profit-maximizing rule
MR = MC (horizontal line) (curved like a check mark) Price = MR = AR
The table below shows the total cost (TC) and marginal cost (MC) for Baker Street, a perfectly competitive firm producing different quantities of apple pies. The market price of apple pies is $4.00 per pie. c. At the market price of $4.00 per apple pie, how many apple pies should Baker Street make? d. If the market price for apple pies were to rise to $6.00 per apple pie, how many apple pies should Baker Street make?
MR: 4,4,4,4,4,4 AR: 4,4,4,4,4,4 25 30
SHUT DOWN
P < AVC
a firm should shutdown if
P < AVC
FORMULA: profit per unit
Price - Average total cost
productive efficiency
Producing output at the lowest possible average total cost of production; using the fewest resources possible to produce a good or service.
Average Revenue (AR) FORMULA
Revenue per unit sold amount of revenue per unit of a product sold = TR/Q
A firm sustains a loss if
TR < TC
FORMULA: Total Revenue
TR x Price = Quantity = P * Q
marginal revenue (MR) FORMULA
The change in a firm's total revenue that results from a 1-unit change in output produced and sold. = Change TR / Change Q
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. P=ATC
Which of the following markets is most likely to be perfectly competitive?
The market for U2 concert tickets
Which of the following markets is most likely to be perfectly competitive?
The market for mushrooms
What are the likely reason(s) that the market for dress shirts is not perfectly competitive?
dress shirts are not a standardized product
In perfectly competition, the demand faced by a single firm is perfectly...
elastic, because many other firms produce the same standardized product
economic profit creates an incentive for other perfectly competitive firms to ______ market
enter
The decision to shut down temporarily is a short-run decision, while the decisions to ____ an industry can be made only in the long run
exit
The marginal costs is the:
extra or additional cost associated with the production of an additional unit of output
price takers
firms that take or accept the market price and have no ability to influence that price
The current market supply and market demand for watches is shown in the graph below. (IMAGE) Walter is a typical watch maker in a perfectly competitive industry whose cost curves are shown in the graph below. (IMAGE) If Walter's costs are typical in the industry, we would expect that in the long run:
firms would exit the market for watches, the price would rise, and each remaining firm in the industry would produce more watches.
The market conditions in which firms do not face do not face incentives to enter or exit the market and firms earn a normal profit is known as _______ - run equilibrium
long
when the total revenue earned by a firm is less than the total cost of production, the firm faces a ______
loss
because the ______ revenue faced by the firms is equal to price, average revenue is also constant and equal to price
marginal
Profit ______ implies that perfectly competitive firms should expand production up to the point where marginal revenue equals marginal cost
maximization
The current market supply and market demand for watches and the costs for an individual firm are shown in the diagrams below. (IMAGESS) Walter is a typical watch maker in a perfectly competitive industry whose cost curves are shown in the graph above. If Walter's costs are typical in the industry, we would expect that in the long run:
new firms would enter the market for watches, the price would fall, and each individual firm in the market would produce fewer watches.
The level of profit that occurs when total revenue is equal to total cost is known as _____ profit
normal
The demand curve facing an individual perfectly competitive firm is a:
perfectly elastic
In the short run, as the price rises,
quantity supplied rises
All firms maximize profits by producing the quantity of output at which the marginal _____ is equal to the marginal _____
revenue; cost
all firms maximize profits by producing the quantity of output at which the marginal______ is equal to the marginal _______
revenue; cost
When it shuts down temporarily in the short run, a perfectly competitive firm
still incurs its total fixed cost
in a perfectly competitive market, homogeneity means that firms must charge the market price for the goods or the services they produce, because:
there are hundreds of other perfectly good substitutes The market is competitive
for a perfectly competitive firm, the market price is equal to:
average revenue marginal revenue demand
FORMULA: average total cost
= average fixed cost + average variable cost
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.
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.
Loss
AVC < P < ATC
In a perfectly completive market, we assume the products are _____ in the minds of consumers
identical
identify the conditions that guarantee consumers will enjoy the lowest prices possible
individual firms are price takers every firm produces the exact same product
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
economic profit
the level of profit that occurs when total revenue is greater than total cost P > ATC
Changes in the variable costs of resources will affect
the marginal costs faced by firms
the price of a good times the number of units sold gives us
total revenue
FORMULA: profit
total revenue - total cost Profit per unit (P - ATC) x Output
economic profit equals
total revenue minus economic cost total revenue minus explicit and implicit costs of production
constant cost industry
an industry in which the firms' cost structures do not vary with changes in production
Profit equals _____ revenue minus _______ cost
total; total
The firm's short-run supply curve is a ______- sloping curve that begins at average variable cost
upward; minimum
The short-run supply curve starts at the minimum average ___ cost
variable
Normal profit is also known as _______ economic profit
zero
The graph below represents the weekly market demand and market supply for soybeans. (IMAGE) Soylent Green is a perfectly competitive firm that produces soybeans. According to the graph, what is Soylent Green's marginal revenue for an extra bushel of soybeans sold?
$50 for an extra bushel of soybeans sold
The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten, a perfectly competitive firm that produces children's mittens in a competitive market. Smitten's Production Costs Quantity MC ATC 5 $1.50 $8.00 10 2.00 5.00 15 2.50 4.50 20 3.50 4.00 25 4.00 4.00 30 5.00 4.50 35 6.00 5.00 40 8.50 5.50 a. If the market price of children's mittens is $6.00 per pair, how many pairs of children's mittens should Smitten produce per week to maximize its profits? b. What is Smitten's average total cost at the profit-maximizing quantity of children's mittens? c. What are Smitten's weekly profits if the market price is $6.00 per pair and the firm produces the profit-maximizing quantity of mittens? d. What are Smitten's weekly profits if the market price is $5.00 per pair and the firm produces the profit-maximizing quantity of mittens? e. At what price would Smitten earn a normal profit?
A. 35 B. $5 C. $35 D. $15 E. $4
The table below shows Ali's monthly costs of producing wheat. Suppose the current market price of wheat is $56.00 per bushel. Ali's Wheat Production Costs Quantity AVC ATC MC 0 — — — 50040.00 240.0040.00 1,000 35.00 85.00 30.00 1,500 30.00 63.33 20.00 2,000 30.00 55.00 30.00 2,500 31.00 51.00 35.00 3,000 32.67 49.33 41.00 3,500 34.86 49.15 48.00 4,000 37.50 50.00 56.00 4,500 40.57 51.67 65.00 5,000 44.00 54.00 75.00 a. If the market price is $56.00 per bushel of wheat, and Ali chooses to produce wheat, how much will he produce per month to maximize his profits in the short run? b. Calculate Ali's monthly profits (express a loss as a negative number) if he chooses to produce the profit-maximizing quantity of wheat at a price of $56.00. c. Assume that the market price of wheat falls to $35.00 per bushel. How much wheat will Ali choose to produce per month in order to maximize his profits in the short run? d. Calculate Ali's monthly profits (express a loss as a negative number) if he chooses to produce the profit-maximizing quantity of wheat at a price of $35.00. e. If the market price of wheat instead falls to $20.00 per bushel, how much wheat will Ali choose to produce per month in order to maximize his profits in the short run?
A. 4,000 B. $24,000 C. 2,500 D. -$40,000 E. 0
By responding the changes in market price, competitive firms produce more of the products we value most and fewer of the products we value least, thereby achieving:
allocative efficiency
when a firm shuts down in the short run, it must still pay the _____ costs
fixed
In a perfectly competitive market, a single firm is a price taker, and therefore, can only charge the _____ price
market
perfect competition
market structure characterized by the interaction of LARGE NUMBER 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
the demand for a perfectly competitive firm's product is a horizontal line originating at the market _____
price
firms that take or accept the market price and have no ability to influence that price are know as ____
price takers
if an economy is going to produce the goods and services, most wanted by society, competitive firms
produce more of the products we value most and fewer of the products we value least
The current market supply and market demand for watches is shown in the graph below. (IMAGE) Walter is a typical watch maker in a perfectly competitive industry whose cost curves are shown in the graph below. (IMAGE) If Walter's costs are typical in the industry, we would expect that in the long run:
the number of firms in the market for watches would remain the same, the price would remain the same, and each individual firm in the industry would continue to produce the same amount of watches.
The graph below shows the weekly market supply and market demand curves for lawnmowers. (IMAGE) Sergei is one of many lawnmower producers in a competitive market. His cost curves are shown in the graph below. (IMAGE) a. Given the market price of lawnmowers, if Sergei wants to maximize profits he should: b. If Sergei's production costs are typical of all perfectly competitive firms in the lawnmower industry, over time: c. If Sergei's production costs are typical of all perfectly competitive firms in the lawnmower industry, we would expect that in the long run:
A. produce 11 lawnmowers per week. B. firms will start to enter the market because economic profits are greater than normal economic profits. C. the market price would fall to $400 per lawnmower and each firm in the market would produce 10 lawnmowers per week.