chapter 12 econ
marginal cost curve intersects the average variable cost where
the average variable cost curve is at its minimum point
prices in a perfectly competitive market are determined by
the interaction of demand and supply
sunk cost
a cost that has already been paid and cannot be recovered
Long run supply curve
a curve that shows the relationship in the long run between market price and the quantity supplied
A perfectly competitive market faces
a horizontal demand curve
product efficiency
a situation in which a good or service is produced at the lowest possible cost
A firm is likely to be a price taker when it represents
a small fraction of the total market
a firm will shut down if producing would cause it to loose
an amount greater than its fixed cost
in the long run the perfectly competitive market supplies
any amount at a price from the firms minimum average total cost curve
In perfectly competitive markets firms can sell
as much output as they want at marginal prices
a shift to the right of the market supply curve
as new firms enter
why dont firms maximize revenue rather than profit
at the point where revenue is maximized the difference between total revenue and total cost may not be maximized
shutdown point
if the price falls bellow this point, the firm shuts down production in the short run
perfect competition results
in product efficiency
In the long run if firms suffer economic losses firms leave and
increase economic profits to zero
when something is doing well more firms will enter the market thus
increasing supply and decreasing equilibrium price
perfectly competitive market
1. many buyers and sellers 2. all firms selling identical products 3. no barriers to new firms entering the market
Allocate efficiency
A state of the economy in which production is an accordance with consumer preferences in particular every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
price taker
a buyer or seller that is unable to affect the market price
the market demand curve is determined by
adding up the quantity demanded by each consumer in the market at each price
the market supply curve is determined by
adding up the quantity supplied by each firm in the market at each price
economic profit includes
both implicit and explicit cost
Consumers and firms have to accept the market price if they want to
buy and sell in a perfectly competitive market
marginal revenue
change in total revenue from selling one more unit of a product
If the market price is higher than the variable cost of production then
continuing operations in the short run is more profitable
In the long run only the consumer benefits from
cost reductions
variable cost
cost that change as output changes
profit
difference between total revenue and total cost
where marginal cost intersects marginal revenue
determines profit maximizing level of output
when there are no barriers to entering a market
economic profit is quickly competed away
If demand goes down and shifts left
equilibrium price will decrease
In the long run a perfectly competitive market will supply whatever amount of a
good consumers demand at a price determined by the minimum point the typical firms average total cost curve
The long run supply curve is a
horizontal line equal to the minimum point on the typical firms average total cost curve
an industry in which the typical firms average cost do not change as the industry expands production will have
horizontal long run supply curve called constant cost industry
The minimum point on the average variable cost curve
is called the shutdown point
a perfectly competitive firm produces where price
is equal to marginal cost
the supply curve for the firm in the short run
is marginal cost
in the short run a firms shut down point
is the minimum point in the average variable cost curve
as long as a firms total revenue is greater than its variable cost
it should continue to produce no matter how large or small its fixed cost are
to determine profit or loss
look at the average total cost curve
the minimum point where firms can afford to produce
marginal cost and average total cost cure lowest point
In the long run competition drives the
market price to the minimum point on the typical firms long run average total cost curve
firms entering the industry
market supply will increase, decreasing the market price
during a temporary shutdown a firm
must still pay its fixed cost
if price is greater than average total cost then
new firms will enter
firms in a perfectly competitive market earn accounting profit but
no economic profit
if price equals average total cost then
no economic proft
The actions of any single consumer or firm have
no effect on the market price
firms marginal cost curve is its supply curve only for
prices at or above average variable cost
Long run equilibrium in perfect competition
results in allocate and productive efficiency
one the marginal cost is greater than the marginal revenue d
stop producing it will be a loss
A firm can reduce its loss bellow the amount of its fixed cost by continuing to produce provided
that the total revenue it receives is greater than its variable cost
in the long run a firms exit point is
the minimum point on the average total cost curve
If an individual wheat farmer tries to increase the price he charges for wheat
the quantity demanded falls to zero because buyers will purchase from others
economic loss
the situation in which a firms total revenue is less than its total cost including all implicit cost
Long run competitive equilibrium
the situation in which the entry and exit of firms has resulted in the typical firm breaking even
marginal cost curve intersects average total cost and average variable cost at
their minimum points
In the long run if firms earn positive economic profits
then new firms will enter and drive economic profit to zero
for a firm in a perfectly competitive market price is equal
to both average revenue and marginal revenue
Average revenue
total revenue divided by the quantity of the product sold
the exit of firms forces up the equilibrium market price
until the typical firm is breaking even
In perfect competition long run equilibrium occurs
when the economic profits zero
a firm will produce at a level of out put
where marginal revenue = marginal cost
the profit maximizing level of output is
where marginal revenue equals marginal cost
An increase in demand temporarily increases the price and allows firms to earn economic profits
which attracts new firms to enter the industry increasing supply driving down the price and eliminating economic profits
losses cause some firms to exit the industry which causes
which causes the market supply curve to shift left and raises the market price allowing the representative firm to break even
a decrease in demand temporarily decreases the price and causes firms to suffer economic losses
which leads to some firms to exit the industry decreasing supply driving up the price and eliminating economic losses