Econ 2: Test 3
Suppose a perfectly competitive firm increases production from 10 units to 11 units. If the market price is $20 per unit, total revenue for 11 units is:
$220
Values are at the profit maximizing out at
(MR = P = MC)
Possibilities in Short Run of P.C
- Companies can make money - Companies can lose money -Companies are the the break-even point
Three sources to have a monopoly
- Legal Restriction - Economies of Scale - Control of Essential Resource
Characteristics of Competitive Market
- Many buyer/ seller - Firms are selling exactly identical products -Buyer and seller are fully informed of the price of input and output - Firms and Inputs are free to enter or leave an industry in the long run
Perfect Competition
- each firm must follow the market price - Demand Curve for a competitive market is perfectly elastic
All competitive firms will end up with ____ economic profit in the long run.
0
4 Types of Market Structure
1. Perfect Competition 2. Monopolistic Competition 3. Oligopoly 4. Monopoly
Patent
20 years: usually applies to pharmeceutical company
The short-run break-even price for the perfectly competitive firm occurs when price equals
ATC. When P = ATC the firm will have sufficient revenue to cover their variable and fixed costs, and will break even earning zero economic or normal profits.
Economies of Scale
As output increases, long run average curve goes down, and cost per unit goes down
A perfectly competitive firm will continue producing in the short run as long as it can cover its
Average Variable Cost
In the long run, all firms in a perfectly competitive industry
Break even
When Price is equal to or greater than Average Total Cost that is called...
Break-even Point
If the Price equals the Average total cost, the firm
Breaks even earning a zero economic profit, or normal profit
For a perfectly competitive firm, price
Equals both average revenue and marginal revenue.
Firm is willing to produce as long as price is ______ AVC
Greater Than
Suppose that the market price in a perfectly competitive industry is $40 per unit. Plot a possible MR line given this price.
In a perfectly competitive industry, each firms MR = MP at any given output rate. Thus, the marginal revenue schedule is horizontal at the market price.
Definition of Industry
Includes all firms that produce similar products to that certain industry
A perfectly elastic long-run supply curve
Indicates that input prices do not change when firms enter or exit the industry. Industry uses a small percentage of the total supply inputs required for industry-wide production that firms can enter the industry without bidding up input prices, so the long -run industry supply curve is therefore horizontal or perfectly elastic.
What is the demand curve for a Monopoly
Inelastic. Nearly Perfectly Inelastic
If ATC is above demand curve then there is a...
Loss
If Total Cost is greater than Total Revenue the company endures a...
Loss
A perfectly competitive firms supply curve is its:
Marginal cost curve above the average variable cost.
If the price is less than the average variable cost, the firm should..
Minimize loss by shutting down and paying only the fixed costs because its average variable costs are not covered by the price of the product.
Natural Monopoly
Monopolies who use Economies of Scale. Ex. Water company or gas company
Price Discrimination
Monopolist who sells different products at different price to maximize profits
Profits are maximized for the perfectly competitive firm when the firm produces the quantity where
P = MC. Total revenue exceeds total cost by the greatest amount. MC=MR.
A firm will continue to operate in the short run, even at an economic loss, as long as
P is greater than minimum AVC.
Two Legal Restrictions
Patent and Licensing
What is the demand curve for Perfect Competition?
Perfectly Elastic
Monopolist is called "______" for market
Price Maker
Competitive Market: each competitive firm is called "_______" because each competitive firm is so small and they no influence on selling price.
Price Taker
Monopolist is called "______" for Firm
Price Taker
The perfectly competitive firm is said to be a...
Price taker - it takes the price given by the market.
If ATC is below demand curve there is a....
Profit
If Total Revenue is greater than Total Cost the company endures a...
Profit
When MR=MC..
Profit Maximization
When Price is equal to or less than Average Variable Cost that is called...
Shutdown Point
Two Types of Monopolies
Simple Monopoly and Price Discrimination
When the marginal revenue equals the marginal cost
The firm is maximizing its profits. MC=MR
In a perfectly competitive market
The price equals the marginal revenue. P=MR
If a perfectly competitive firm sells the product for a profit-maximizing price of 4.76 and has average total cost per unit of $5.15, in the short run.
This firm should shut down if 4.76 is less than the AVC. This firm is losing money. This firm must hope the market price rises soon or exit the industry.
If the price is less than the average total cost, but greater than the average variable cost, the firm
Will have a loss in the short-run, but should still operate because its average variable costs are covered by the price of the product. Loss will be minimized by producing the output level where marginal revenue equals marginal cost. In this case, the loss will be less than the fixed cost the firm would lose if it shuts down.
In long-run equilibrium, the perfectly competitive firm makes
Zero economic profits. Long-run eq. occurs after firms have been allowed to either enter or leave. If there are zero economic profits there is no incentive for industry entry or exit. This is consistent with long-run eq.
In the graph, if price is P1, the profit-maximizing rate of output is
Zero. Since the price is below the AVC(the shut-down point), the firm will not produce any output.
A break-even point occurs at the level of output at which:
average revenue equal average total cost
Perfect Competition is important to study because it:
is a theoretical extreme used for analysis
The average revenue received by a firm in a perfectly competitive market:
is equal to the market price
Since lithium is homogenous and indistinguishable across firms, the market for lithium
is perfectly competitive.
Profit-Maximizing rate of production
is the rate of production that maximizes total profits, or the difference between total revenues and total costs. Also, it is the rate of production at which marginal revenue equals marginal cost.
Licensing
lottery is an example, because not everyone can get those tickets to win big money. These stores are the only ones authorized by the state to give these tickets.
The profit-maximizing level of output for a perfectly competitive firm occurs where:
marginal revenue equals marginal cost
Simple Monopoly
monopolist sells all products at one price
The demand curve for the product sold by a firm in a perfectly competitive market is:
perfectly elastic
A condition needed for a perfectly competitive industry to exist is that:
there are no obstacles to the free mobility of resources
The profit maximizing level of output for a perfectly competitive firm occurs where there is equality between the slopes of the:
total revenue and total cost curves
A perfectly competitive firm charging $4 and selling 1000 units a month. The firm raises its price by a nickel above the market price. Its profit...
will go to zero
