5. Chapter 14 Flashcards
What is a competitive market?
What makes a competitive market perfect?
A market in which there are many buyers and many sellers so that each had a negligible impact on the market price
Perfectly competitive markets have:
1. Many buyers and seller in the market
2. The goods offered by the various sellers are largely the same
3. Firms can freely enter and exit the market
What is a price taker?
Buyers and sellers that must accept the price the market determines in a competitive market
What is the average revenue and marginal revenue?
Average revenue- total revenue divided by the quantity sold
For all firms, Average revenue equals the price of a good
Marginal revenue- the change in total revenue from an additional unit sold
For competitive firms, marginal revenue equals the price of a good
Graphs on pages 279 and 281
If a firms marginal revenue is greater than their marginal cost what should they do?
What about if their marginal cost is greater than their marginal revenue?
If marginal revenue is greater than marginal cost they should increase production since they’re making more revenue than they’re losing through costs
If marginal cost is higher than marginal revenue then they should decrease production since they’re losing money
Graph of marginal revenue and cost on page 282
What are the three rules for profit maximization?
- If marginal revenue is greater than marginal cost, the firm should increase output
- If marginal cost is greater than marginal revenue, the firm should decrease its output
- At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal
Where do you find the profit maximizing quantity for a firm on a graph?
If is the point where the price and the marginal cost curve intersect
Graph on page 282
Qmax
Is the marginal cost curve the supply curve for a competitive firm?
Yes since the marginal cost curve determines the quantity of the good the fork is willing to supply at any price (price horizontal line)
What is a shutdown and an exit with a firm?
Shutdown- short run decision to not produce anything during a specific period of time because of current market conditions
Exit- long run decision to leave the market
Firms can avoid fixed costs in the long run but not short run
(Firm that shuts down still has to pay fixed costs but one that exits does not have to pay any costs at all)
Farming example on page 284
What circumstances result in a shut down?
If the revenue that a firm would earn from producing is less than its variable costs of production, the firm will shut down
(If the piece of a good is less than the average variable cost of production)
TR
What is a sunk cost?
A cost that has already been committed and can not be recovered
Usually ignored since you can do nothing about them
Irrelevance if sunken costs are beneficial (if you think you’ll spend 15 to see a movie but the ticket is 10 and you lose the ticket it is a sunken cost and you can buy another one since the 10 dollar ticket is cheaper than what you thought you’d pay
How is profit displayed on a price and quantity graph?
How is loss?
Page 288!!
It is a shaded reactangle where it’s height is price-Average total cost and it’s width is The quantity
Area of rectangle is (P-ATC) x Q
Loss is ATC-P for height instead of P-ATC
When is the process of entry and exits of firms in a market at the end?
When the firms that remain in the market have an economic profit of 0
Price of the good equals the average total cost of producing that good
If profit is positive (price>average total cost)
Firms will want to enter the market
If profit is negative, firms will want to leave
What must the long run equilibrium of a competitive market with free entry and exit have?
Must have operating at their efficient scale
Efficiency scale of the level of pro suction with lowest average total cost
Graph on page 290
Why is the long run market supply curve horizontal (perfectly elastic) at the minimum of the average total cost?
What do reasons cause this curve to slope upward?
There are a large number of potential entrants, each of which faces the same costs
1. Some resources used in production may be available in limited quantities (for farming quantity of land available to buy is limited)
2. Firms may have different costs (anyone can paint but not all can sell for the same cost, those with lower costs are more likely to enter)
Graph on page 294
What is the marginal firm?
The form that would exit the market of the price was any lower
