chapter 12

Decreasing-cost industries

have​ downward-sloping long-run supply curves. Any industry in which the typical​ firm's average costs decrease as the industry expands production will have a​ downward-sloping long-run supply curve.

​Increasing-cost industries

have​ upward-sloping long-run supply curves. Any industry in which the typical​ firm's average costs increase as the industry expands production will have an​ upward-sloping long-run supply curve.

Perfect competition is characterized by all of the following except

heavy advertising by individual sellers.

Max​ Shreck, an​ accountant, quit his​ $80,000-a-year job and bought an existing tattoo parlor from its previous​ owner, Sylvia Sidney. The lease has five years remaining and requires a monthly payment of​ $4,000. The lease

is a fixed cost of operating the tattoo parlor.

What conditions make a market perfectly​ competitive? A market is perfectly competitive if

it has many buyers and many​ sellers, all of whom are selling identical​ products, with no barriers to new firms entering the market

Price taker

A buyer or seller that is unable to affect the market price. Because farmer Smith is a price​ taker, he can sell as many baskets of apples as he chooses at the market pricelong dash—but he​ can't sell any apples at all at a higher price.

​Long-run supply​ curve:

A curve that shows the relationship between market price and the quantity supplied.

Allocative​ efficiency:

A state of the economy in which production represents consumer preferences.

Average revenue​ (AR)

Average revenue is total revenue divided by the quantity of the product​ sold: AR=TR/Q

​Long-run equilibrium:

The situation in which the entry and exit of firms has resulted in the typical firm breaking even.

Profits and​ losses:

If P​ < ATC, then a firm will experience losses.

Profits and​ losses:

If P​ = ATC, then a firm will break even.

Profits and​ losses:

If P​ > ATC, then a firm will make a profit.

Perfect competition

In perfectly competitive​ markets, firms are price takerslong dash—they accept the market price as​ given, but not fixed. That​ is, events in the market​ (a change in demand or a change in​ supply) might change market​ price, but the individual buyer or seller is unable to affect the market price.

Marginal revenue​ (MR)

Marginal revenue is the change in total revenue from selling one more unit of a product. More​ formally, it is the change in total revenue that results from a​ one-unit change in​ quantity, or:

Which of the following is an expression of profit for a perfectly competitive​ firm? Profit for a perfectly competitive firm can be expressed as

Profit=(P-ATC)x Upper Q(P−ATC)×Q​, where P is​ price, Q is​ output, and ATC is average total cost.

Entry and exit​ decisions:

Profits and losses provide signals to firms that lead to entry and exit in the long run.

A firm will break even when

P​ = ATC

Which of the following describes the difference between the market demand curve for a perfectly competitive industry and the demand curve for a firm in this​ industry?

The market demand curve is downward​ sloping; the​ firm's demand curve is a horizontal line.

Productive efficiency

The situation in which a good or service is produced at the lowest possible cost.

Total revenue​ (TR)

Total revenue equals price multiplied by​ quantity: TR=P×Q.

Firms that are price takers

are able to sell all their output at the market price.

Suppose the market for cotton is perfectly competitive and that input prices decreasedecrease as the industry expands. Characterize the​ industry's long-run supply curve. The cotton​ industry's long-run supply curve will be

downward sloping because the​ long-run average cost of production will be decreasing

For a firm in a perfectly competitive​ market, price is

equal to both average revenue and marginal revenue.

If P​ < ATC, then

existing firms will exit. If existing firms​ exit, then the market supply curve will shift to the​ left, and increase the market price.

​Constant-cost industries

have horizontal​ long-run supply curves. Any industry in which the typical​ firm's average costs do not change as the industry expands production will have a horizontal​ long-run supply curve.

The price of a​ seller's product in perfect competition is determined by

market demand and market supply.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run? In a perfectly competitive industry in the long​ run,

new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

If P​ > ATC​, then

new firms will enter the market. If new firms​ enter, then the market supply curve will shift to the right and decrease the market price.

At the profitminus−maximizing level of output for a perfectly competitive​ firm,

price equals marginal cost.

Does the market system result in allocative​ efficiency? In the long​ run, perfect competition

results in allocative efficiency because firms produce where price equals marginal cost.

Does the market system result in productive​ efficiency? In the long​ run, perfect competition

results in productive efficiency because firms enter and exit until they break even where price equals minimum average cost.

What is the supply curve for a perfectly competitive firm in the short​ run? The supply curve for a firm in a perfectly competitive market in the short run is

that​ firm's marginal cost curve for prices at or above average variable cost.

How should firms in perfectly competitive markets decide how much to​ produce? Perfectly competitive firms should produce the quantity where

the difference between total revenue and total cost is as large as possible.

Assume the market for oranges is perfectly competitive. If the demand for oranges​ increases, will the market supply additional​ oranges? If the demand for oranges​ increases, then the market

will supply additional oranges because producers seek the highest return on their investments.