05 Perfect Competition Flashcards
Productivity
Can be measured by looking at the time it takes a worker to produce good
As price increases, firms in a perfectly competitive market find…
It is beneficial to produce more units of output because price now equals marginal cost at a higher level of output.
Average variable cost (AVC)
AVC = VC / Q
Average total cost (ATC)
ATC = TC / Q
Profit =
Total revenue - total cost (total cost includes implicit and explicit costs)
Principle of increasing opportunity cost
Once all factors of production are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.
Market supply and market demand set the price
Buyers and sellers are price takers
Imperfectly competitive firms have..
Some control over price
Production
Converts inputs into outputs
A factor of production
An input used in the production of a good or service
Short run
Period of time when at least one of the firm’s factors of production is fixed
Long run
Period of time in which all inputs are variable
Law of diminishing returns
When some factors of production are fixed and there is an increase in the production of a good, a larger increase in variable factors are required
Fixed cost (FC) aka capital cost
Sum of all payments for fixed inputs
Variable cost (VC)
Sum of all payments for variable inputs
Total cost
Sum of all payments for all inputs (fixed + variable)
Marginal cost
Change in total cost divided by the change in output (MC = ^TC / ^Q)
Marginal revenue
= price x additional
Increase output if..
Marginal benefit is at least as great as marginal cost
Decrease output if..
Marginal benefit is greater than marginal cost
Total Revenue
TR = P*Q
Profit
TR-TC
Shut down if…
Revenue is less than variable cost (P*Q < VC or P < AVC)
Profitable if..
Total revenue > total cost
Losses
(ATC - P) *Q
Profit on graph
Area of rectangle with height (P-ATC) and width Q
Losses on graph
Area of rectangle with height ATC-P and width Q
The perfectly competitive firm’s supply curve..
Is its marginal cost curve (at every quantity on market supply curve, price is equal to seller’s marginal cost of production)
Producer surplus
The difference between the market price and the seller’s reservation pri (above supply curve and below market price)
When the price of a similar good increases..
Firms have an incentive to produce more of the now higher-priced good.
Profit maximisation rule
A firm should continue to produce output as long as price is at least as great as marginal cost
FC
= TC - VC
