perfectly competitive markets Ch 14

long run to short run and back

if Demand increase-> Price increases, for existing firms quantity increase and market Quantity increases {short run} -new firms enter-> price in market decrease, for existing firms quantity decreases, market Quantity increases(new firms entered)

In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure. The long-run supply curve for this market is: Output Total Cost 0 $0 1 $10 2 $12 3 $15 4 $24 5 $40

horizontal at a price of $5.

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average total cost of production equal to $6, and is earning $240 economic profit in the short run. What is the current market price?

$12

Suppose a firm in a competitive market produces and sells 150 units of output and earns $1,800 in total revenue from the sales. If the firm increases its output to 200 units, the average revenue of the 200th unit will be

$12

A firm in a competitive market has the following cost structure. What is the lowest price at which this firm might choose to operate? Output Total Costs 0 $1 1 $6 2 $9 3 $10 4 $17 5 $26

$3

Price Quantity $4 0 $4 1 $4 2 $4 3 $4 4 $4 5 The table represents a demand curve faced by a firm in a competitive market. The marginal revenue from selling the 3rd unit is

$4

characteristics

*1. goods are homogeneous(same) 2. no gov' intervention *3. many buyers and many sellers *4. all people are price takers 5. no market power *6. costless entry and exit in the long run 7. perfect information

exit market

-exit market if the revenue it would get from producing is less then its then its total costs *TR<TC * TR/Q < TC/Q *TR/ATC -firms with losses(negative profits) ; maximizing profits by minimizing loss- not making enough revenue on each unit to cover its average total cot it would choose to exit the market in the long run

firm supply curves

-long run supply curve-is the portion of its marginal cost curve that lies above ATC -short run supply curve is the proportion of its marginal cost curve that live above AVC

firms profit in short run

-profit = TR-FC-VC (if TR and VC both = 0-> profit = -FC) -even if firms is not producing still has to pay fixed costs, still makes profit -(negative profit) -profit>0 (positive profit)-> P>ATC -profit<0 (negative profit)-> P<ATC *will still produce bc price is above AVC -loss in profit is less then loss if it shuts down -negative, 0, or positive all possibilities becuz firms pay fixed costs

profit maximization

1. if MR>MC-> firm should increase output 2. If MR< MC-> firm should decrease output 3. at profit-maximizing level of output, marginal revenue and marginal cost are exactly equal

long run profits

1. profits>0 provides incentive for new firms to enter-> new firms enter->market supply curve increase-> price decreases -> TR decreases -> profit decreases 2. profit < 0 -> firms leave and exit industry -> supply decreases -> price increases -> TR increases -> profit increases 3. profit=0 -> only substantial option, no positive or negative profit, no entrance/exit market, no tendency for market to change -long run equilibrium-> no tendency for market to change= break even point=all at efficient points

long run production

1.if p>0 then MR=P=LCM 2. production =0 then P<LATC - firms exit the industry long run supply curve = LMC upward sloping and above LATC

Susan quit her job as a teacher, which paid her $36,000 per year, in order to start her own catering business. She spent $12,000 of her savings, which had been earning 10 percent interest per year, on equipment for her business. She also borrowed $12,000 from her bank at 10 percent interest, which she also spent on equipment. For the past several months she has spent $1,000 per month on ingredients and other variable costs. Also for the past several months she has earned $4,500 in monthly revenue.

In the short run, Susan should continue to operate her business, but in the long run she will probably face competition from newly entering firms

enter market if

P>ATC

profit

Profit=(P-ATC)*Q -> operating firms has zero profit if and only if the price of the good = ATC of producing that good [entry and exit end only when price and average total cost are driven to equality] area between ATC and P = firms profit (p>ATC) or loss (p<ATC) -firms that remain in the market must be making zero economic profit

Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost

The firm will immediately stop production to minimize its losses

supply curve

bc firm's marginal-cost curve determines the quantity of the good the firm is willing to supply at any price, the marginal cost curve is also the competitive firm's supply curve -portion of marginal cost curve above average variable cost curve

marginal revenue

change in total revenue from selling on more unit MR=P (only true for competitive markets) rational people make decisions at the margin all firms will continue to produce until MR=MC -will make incremental adjustments to the level of production, they end up producing the profit maximizing quantity

If occupational safety laws were changed so that firms no longer had to take expensive steps to meet regulatory requirements, we would expect that

competition would force producers to pass the lower production costs on to consumers in the long run.

Mrs. Smith operates a business in a competitive market. The current market price is $8.10. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should

continue to operate in the short run but shut down in the long run.

sunk costs

cost that s already been committed and cannot be recovered -should not considered when making decisions (can not recover fix cost if you temporarily shut down business)

long run to short run and back

if demand decreases, Price decreases, individual quantity decreases, market Quantity decreases {short run} -price<ATC= making negative profit-negative profit{short run} firms exit when P<AVC ->supply decreases, price increases, individual quantity increases, market Quantity decreases

market supply curve

in long run firm will enter or exit market until profit is driven to zero. As a result price = minimum average total costs. The number of firms adjusts to ensure that all demand is satisfied at this price. The long-run market supply curve is horizontal at this price -long run market supply -horizontal line

Consider a competitive market with a large number of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market, an increase in demand will

increase price in the short run but not in the long run

A certain competitive firm sells its output for $20 per unit. The 50th unit of output that the firm produces has a marginal cost of $22. Production of the 50th unit of output does not necessarily

increase the firm's average variable cost by $0.44.

Winona's Fudge Shoppe is maximizing profits by producing 1,000 pounds of fudge per day. If Winona's fixed costs unexpectedly increase and the market price remains constant, then the short run profit-maximizing level of output

is still 1,000 pounds.

Laura is a gourmet chef who runs a small catering business in a competitive industry. Laura specializes in making wedding cakes. Laura sells 20 wedding cakes per month. Her monthly total revenue is $5,000. The marginal cost of making a wedding cake is $300. In order to maximize profits, Laura should

make fewer than 20 wedding cakes per month.

The competitive firm's short-run supply curve is that portion of the

marginal cost curve that lies above average variable cost

Suppose a firm operates in the short run at a price above its average total cost of production. In the long run the firm should expect

new firms to enter the market.

short run production

objective-maximize profits profit=TR-TC (total revenue proportional to amount of output)

Which of the following statements is correct? -For all firms, marginal revenue equals the price of the good. -Only for competitive firms does average revenue equal the price of the good. -Marginal revenue can be calculated as total revenue divided by the quantity sold. -Only for competitive firms does average revenue equal marginal revenue.

only for competitive firms does average revenue equal marginal revenue

A profit-maximizing firm in a competitive market will always make marginal adjustments to production as long as

price is above or below marginal cost.

The accountants hired by the Brookside Racquet Club have determined total fixed cost to be $75,000, total variable cost to be $130,000, and total revenue to be $125,000. Because of this information, in the short run, the Brookside Racquet Club should

shut down because staying open would be more expensive.

shut down

shut down when TR<VC TR/Q<VC/Q

The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average

total cost.

average revenue

total revenue divided by the quantity sold AR=TR/Q AR= P (true for all firms in every market)