chapter 12 econ

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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


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