Introduction to Economics Test# 2 Chapter 11 Perfect Competition

The four Market types

1) Perfect Competition 2) Monopoly 3) Monopolistic Competition 4) Oligopoly

Price taker

A firm that cannot influence the price of the good or service that it produces.

Monopoly

A market in which 1) one firm sells a good or service 2) that has no close substitutes and 3) a barrier blocks the entry of new firms

Perfect Competition

A market in which there are 1)Many firms selling an identical product. 2)There are no barriers t entry into (or exit from) the market. 3)Established firms have no advantage over new firms. 4) Sellers and buyers are well informed about prices.

Monopolistic Competition

A market in which: A large number of firms compete by making similar but slightly different products.

Oligopoly

A market in which: A small number of interdependent firms compete.

Is perfect Competition Efficient?

An efficient outcome is one in which scarce resources are allocated to their highest-value use. Perfect competition achieves such an outcome.

The effect of Exiting in the long run

As more firms enter the market, the price falls to a point where the firms incur economic losses. Some firms begin to exit the market. As firms exit, the market supply curve shifts leftward, output decreases, and the market price rises. As the price rises, the remaining firms in the market move up along their supply curve and increase output. The profit-maximizing output increases. As the price rises and each firm sells more, economic loss decreases.

Why a firm in a perfectly competitive market is a price taker?

Since in perfect Competition many firms are selling the same product, there is nothing that makes your product better than the product of other firms, and all the buyers of the product know the price they must pay. That makes a firm in a perfectly competitive market a price taker.

Marginal revenue

The change in total revenue that results from a one-unit increase in the quantity sold.

Shutdown point

The point at which price equals minimum average variable cost and average variable cost is at its minimum.

In perfect competition Marginal revenue=price

The reason is that the firm can sell any quantity it chooses at the going market price and total revenue increases by that amount. The increase in total revenue is marginal revenue.

Why when MC=MR is the firm's profit maximizing point?

As output increases, marginal revenue is constant but marginal cost eventually increases. If MR>MC, then the revenue from selling one more unit exceeds the cost of producing that unit and an increase in output increases economic profit. If MR<MC, then the revenue from selling one more unit is less than the cost of producing the unit and a decrease in output increases economic profit. If MR=MC, then the revenue from selling one more unit equals the cost incurred to produce that unit. Economic profit is maximized and either an increase or decrease in output decreases economic profit.

Economic loss and its relation to exit

Economic loss is an incentive for firms to exit a market, but as they do so, the price rises and the economic loss of each remaining firm decreases.

Economic profit and its relation to entry

Economic profit is an incentive for new firms to enter a market, but as they do so, the price falls and the economic profit of each existing firm decreases.

Entry and Exit in the long run

Entry and Exit are the market forces that shift the supply curve and move the price to minimum average total cost in the long run.

Change in demand

In the long run, when market demand increases, the market price rises, firms increase production to keep marginal cost equal to price (MR) and firms make and economic profit. The market is in short-run equilibrium again. Economic profit is an incentive for new firms to enter the market. As firms enter, market supply increases and the market price falls. With a lower price, firms decrease output to keep marginal cost equal to Marginal Revenue (Price)

Technological Change

New technologies lower cost, the cost curve of a firm shifts downward. With lower cost, market supply increases and the price falls.

Profit Maximizing Output

One way to find the profit-Maximizing output is to use a firm's total revenue and total cost curves. Profit is maximized at the output level at which total revenue exceeds total cost by the largest amount.

The Effect of Entry in the long run

When times are good for firms and economic profit is high, New firms begin to enter the market. As they do so, supply increases and the market supply curve shifts rightward. With the greater market supply and unchanged market demand, the market price falls and the equilibrium quantity increases. Market output increases, but because the price falls, the firms decrease output. As the price falls, each firm's output Gradually returns to its original level