Ch 12
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.