Chapter 6: Perfectly Competitive Supply
consumer surplus un the market (graph)..
is the area bounded above by the demand curve and bounded below by the market price.
profit
the total revenue a firm receives from the sale of its product minus all costs---explicit and implicit---incurred in producing it.
Average total cost
total cost divided by total output. ATC = TC/Q
4 characteristics of perfectly competitive markets
1. all firms sell the same standardized product. 2. The market has many buyers and seller, each of which buys or sells only a small fraction of the total quantity exchanged. 3. productive resources are mobile. 4. buyers and sellers are well informed.
Profit
Profit = total revenue - total cost = total revenue - variable cost - fixed cost
imperfectly competitive firms
a firm that has at least some control over the market price of its product.
profit-maximizing firm
a firm whose primary goal is to maximize the difference between its total revenues and total costs.
profitable firm
a firm whose total revenue exceeds its total costs. (P X Q) > (ATC X Q)
perfectly competitive markets
a market in which no individual supplier has a significant influence on the market price of the product.
long run
a period of time of sufficient length that all the firm's factors of production are variable.
short run
a period of time sufficiently short that at least some of the firm's factors of production are fixed. "a period of time during which at least some of the firm's factors of production cannot be varied."
law of diminishing returns
a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases the variable factor.
factor of production
an input used in the production off a good or service.
variable factor of production
an input whose quantity can be altered int eh short run.
fixed factor of production
an input whose quantity cannot be altered in the short run.
marginal cost
as output changes form one level to another, the change in total cost divided by the corresponding change in output.
for the short run and the long run the perfectly competitive firm's supply curve is its ________________________.
marginal cost curve
Among the relevant factors causing supply curves to shift are....
new technologies, changes in input prices, changes in the number of sellers, expectations of future prices, and changes in the prices of other products that firms might produce.
for every price-quantity pair along the market supply curve,...
price will be equal to each sellers marginal cost of production
"law of supply"
producers offer more of a product for sale when its price rises. -only valid in the short run.
producer surplus
the amount by which price exceeds the seller's reservation price. -on the graph it is bounded above by the market price and bounded below by the market supply curve.
a firm should increase its output if and only if...
the marginal benefit exceeds the marginal cost.
short-run shutdown condition
the market price of the firm's product falls so low that its revenues form sales is smaller than its variable cost of all possible levels of output. -cease production for the time being -suffer a loss equal to its fixed costs P X Q < VC "discontinue operations in the short run if the product price is less than the minimum value of its average variable cost (AVC). P < minimum value of AVC
the prices at which goods and services are offered fro sale in a market depend, in turn, on...
the opportunity cost of the resources required to produce them.
total cost
the sum of all payments made to the firm's fixed and variable factors of production.
fixed cost
the sum of all payments made to the firm's fixed factors of production.
variable cost
the sum of all payments made to the firm's variable factors of production
Average variable cost (AVC)
variable cost divided by total output. VC/Q
