Econ Ch. 12 - 15 (Competitive Markets, Imperfect Competition, Externalities/Public Goods)

define price taker

a company that must accept the prevailing prices in the market of its products, its own transactions being unable to affect the market price

define constant-cost industry

an industry in which the typical firm's average costs do not change as the industry expands production e.g. the carrot industry; even as more farmers enter the market, the amount it costs a firm to produce a single carrot does not change

price effect

as a firm lowers prices, the firm receives less revenue for each item it could have sold at the highest price marginal revenue = change in total revenue from selling one more unit

define increasing-cost industry

e.g. if the resources needed to produce the product are limited: as more firms enter the market, it costs more for a single firm to produce a single item

Monopolistic Competition: how does changing the price affect the demand curve for a given firm?

increasing the price decreases the quantity demanded this is the case because products in a monopolistic competition market are differentiated

1. number of firms 2. type of product 2. ease of entry in the following market structures: -perfect competition -monopolistic competition -oligopoly -monopoly

-perfect competition 1. many firms 2. identical products 3. easy entry e.g. growing wheat, growing apples -monopolistic competition 1. many firms 2. differentiated products 3. easy entry e.g. clothing stores, restaurants -oligopoly 1. few firms 2. identical or differentiated products 3. difficult entry e.g. manufacturing computers or automobiles -monopoly 1. one firm 2. unique products 3. entry blocked e.g. tap water

perfectly competitive industry

-unable to control the prices of the products they sell -do NOT earn an economic profit in the long run

at what quantity output is the total profit maximized?

-when difference between total revenue and total cost is the greatest -where marginal revenue equals marginal cost (because here the instantaneous profit is positive

why aren't firms in perfectly competitive industries able to earn profits in the long run?

1. firms in these industries sell identical products 2. it is easy for new firms to enter these industries

To maximize profit, a firm produces the quantity such that marginal revenue equals marginal cost. But will a firm actually make a profit when marginal revenue equals marginal cost?

MAYBE. we have to see what the average total cost is. If price > average total cost, yes profit if price = average total cost, the firm breaks even if price < average total cost, the firm experiences a loss marginal revenue = price in a perfectly competitive market

how is the market supply curve constructed?

add up the quantity supplied by each firm in the market at each price each firm's marginal cost curve tells us how much that firm will supply at each price so the market supply curve can be derived directly from the marginal cost curves of the firms in the market

marginal revenue in a perfectly competitive market

change in total revenue/change in quantity for a firm in a perfectly competitive market, price is equal to both average revenue and marginal revenue

as long as average revenue is greater than average variable cost, the firm should

continue producing because that'll lower average fixed cost

marginal revenue curve for a perfectly competitive firm is the same as its ___

demand curve for the demand curve, no matter what quantity you sell, each item will be sold at the market price for the marginal revenue curve, each item you sell will give you (MARKET_PRICE) in revenue

in a perfectly competitive market, a firm's average revenue (regardless of quantity sold) is equal to __

equal to market price

starbucks will maximize profits by selling the quantity of caffe lattes for which the _____

last caffe latte sold adds the same amount to the firm's revenue as to its costs

in a monopolistically competitive market, marginal revenue is ___ than price. why?

marginal revenue is less than price because to sell an additional item, you must lower the price. (in contrast, in a perfectly competitive market, you wouldn't want to lower the price, because you can just produce more product at the same price, without affecting the price or marginal revenue at all.) due to the price effect, the previous items are sold at lower prices as well. therefore, although total revenue increases, it does not increase by the price. R_init = Q_init * P_init (where P_init is a high price) R_new = Q_new * P_new (where P_new is a low price) R_new may be greater than R_init, but R_new - R_init will be less than (Q_new-Q_init)*P_init (because P_new is a lower price than P_init; that lower price was necessary to get the new customers)

long-run supply curve shows the relationship in the long run between

market price and quantity supplied 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 on the typical firm's average cost curve anything that raises or lowers the costs of the typical firm in the long run will cause the long-run supply curve to shift

what is the shutdown point?

minimum point on the average variable cost curve

why can't a firm earn economic profit for very long?

other farmers entering the market will shift supply curve to the right (will cause quantity to increase for a given price, therefore driving equilibrium price down) as the market price falls, each farmer's demand curve will shift down (because market price decreases). when price = ATC, each farmer is just breaking even, and return on their investment is just covering the opportunity cost of farming. at this point, new farmers will stop entering the market because the rate of return from selling carrots in farmers' markets is no better than they can earn by selling them elsewhere--the price remains at this point. note: economic profit != accounting profit economic profit includes opportunity cost; so that's why it's zero; a zero economic profit in farming means that the benefit of farming equals the benefit of doing some other economic activity

allocative efficiency definition

perfectly competitive firms produce a good up to the point where the marginal cost of producing another unit is equal to the marginal benefit consumers receive from consuming that unit firms supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them

economic profit =

revenue - implicit costs (opportunity costs) - explicit costs

a perfectly competitive firm's marginal cost curve is also its

supply curve (at or above average variable cost, b/c if the price drops below AVC, it makes more sense for the firm to shut down, because it's losing money on each item produced) the supply curve for a firm tells us how many units of the product the firm is willing to sell for a given price the marginal cost curve tells us the same thing, because the firm will produce until P = MC therefore, the marginal cost curve tells us how many items the producer is willing to produce at a given cost

define economies of scale/decreasing-cost industry

typical firm's costs fall as the industry expands economy of scale = average cost declines as output increases decreasing-cost industry: industries with downward sloping supply curves

productive efficiency definition

when a good or service is produced at the lowest possible cost forces of competition drive the market price to the typical firm's minimum average cost