Econ Chapter 11 (12) - Perfectly Competitive

Relationship of Price to ATC

-P > ATC, firm makes a profit -P = ATC, firm breaks even (TC=TR) -P<ATC, firm experiences loss

Supply curve of a firm in the short run

-a perfectly competitive firm's marginal cost curve is also its supply curve ONLY for prices at or above AVC (average variable cost)

Area representing total profit on the graph

-green rectangle -height is equal to (P-ATC) -base is equal to Q

Profit maximizing level of output

-is where the difference between total revenue and total cost is the greatest -also where marginal revenue equals marginal cost *true for all types of markets -price is equal to marginal revenue ---*in PCM

Marginal revenue curve

-same as the demand curve in a PCM -horizontal line

Firms in a perfectly competitive market

-unable to control prices of the products they sell -unable to earn economic profit in the long run because: 1) sell identical products 2) easy entry for new firms

MR. DARP

Marginal Revenue, Demand, Average Revenue, and Price are all equal for PC

Profit related to Average Total Cost (ATC)

Profit = (P-ATC) X Q

Revenue Table

Quantity / Price/ Total Revenue (P X Q)/ Average Revenue (TR/Q)/ Marginal Revenue (∆TR/∆Q)

Profit

Total Revenue - Total Cost

Allocative efficiency

a state of the economy in which production represents consumer preferences; in particular, every good or service is produce dup to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it -entrepreneurs efficiently allocate labor, machinery and other inputs to produce the good and services that best satisfy consumers wants -PCM achieves this

monopsony

one buyer with a bunch of sellers, gives a huge amount of power to the buyer

Economic loss

the situation in which a firms total revenue is less than its total cost, including all implicit costs

Productive efficiency

the situation in which a good or service is produced at the lowest possible cost -PCM results in this

Long run competitive equilibrium

the situation in which the entry and exit of firms has resulted n the typical firm breaking even -entry forces down the market price until firms break even, economic loss cause firms to exit, the exit forces up the market price until the firm is breaking even

What is a firms objective?

to maximixe profits (the difference between total revenue and total cost) (Profit = TR-TC) - to do this they should produce the quantity of product where the difference between TR he receives and TC is as large as possible

The more firms in the industry the further ___ the the market supply curve

to the right

Average revenue

total revenue/quantity of product sold -always equal to the market price in PCM

Decreasing cost industries

industries with downward sloping long run supply curves

Increasing cost industries

industries with upward sloping long run supply curves

when is there economic loss?

when ATC intersects MC above the MR curve

When is there economic profit?

when ATC intersects MC below MR curve

3 conditions of a Perfectly Competitive Market

1) Many firms and buyers, all of which are small relative to the market 2) Identical products sold by all firms in the market *hardest characteristic to meet 3) No barriers to new firms entering the market -Examples: growing wheat, growing apples, agricultural commodities and financial products

Firm's choices in the short run if it is experiencing loss

1) continue to produce 2) stop production by shutting down temporarily (still has to pay its fixed costs like a lease, so will suffer a loss equal to fixed costs. Assuming fixed costs are sunk costs) *Sunk costs should be irrelevant to decision making *whether total revenue is greater or less than VARIABLE COSTS is the key to deciding whether or not to shut down. if its greater, continue to produce

3 characteristics of any industry

1) number of firms in the industry 2) the similarity of the good or service produced by the firms in the industry 3) the ease with which new firms can enter the industry -these are used to classify industries into the four market structures

What three questions do we want to answer for each firm?

1) should the firm produce? 2) if so, how much? 3) what is the profit/loss earned? -only produce if profit ism ore than what it would be if you didn't produce -seek the quantity that maximizes profit and minimizes loss

How are prices determined in a perfectly competitive market?

By the interaction of demand and supply. -the actions of any single consumer or firm have no effect on the market price. -consumers and firms have to accept the market price if the want to buy and sell in this kind of market

Price taker

a buyer or seller that is unable to affect the market price -PCM firms will have to be this because they have to charge the same price as any other firm in the market or they will lose customers to their competitors

Sunk costs

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 -in the long run, a PCM will supply whatever amount of a good consumers demand at a price determined by the minimum point on the typical firm's ATC curve

Economic profit

a firm's revenues minus all its costs, implicit and explicit

What does the demand curve look like?

a horizontal line. -can sell as much as it wants at the market price, but can't sell anything at all if it raises the price by even 1 cent. -Quantity goes up, price stays the same -the firms output is very small relative to the goal market output -price is determined by the intersection of market demand and market supply

Shut down point

the minimum point on the average variable cost curve

Marginal revenue

∆TR/∆Q -change in total revenue/change in quantity -always equal to the market price in PCM