Ch.12- Firms in Perfectly Competitive Markets Flashcards
Perfectly Competitive Market Rules
- Many buyers and sellers exist
- All firms sell identical products
- There are no barriers to new firms entering the market
Market structures
Model how firms in a market interact with demand side to sell their outputs
Perfect Competition
Number of firms: Many
Type of product: Identical
Ease of entry: High
Examples of industries: growing wheat, poultry farming
Monopolistic Competition
Number of firms: many
Type of product: differentiation
Ease of entry: high
Examples of industries: clothing stores, restaurants
Oligopoly
Number of firms: few
Type of product: identical or differentiate
Ease of entry: low…
Examples of industries: manufacturing computers or automobiles
Monopoly
Number of firms: one
Type of product: Unique
Ease of entry: Entry-BLOCKED BOIII
Examples of industries: Providing tap water, mail delivery
Order of increasing market concentration
Perfect->Monopolistic->Oligopoly -> Monopoly
Price takers
-this describes perfectly competitive firms
-unable to affect market price
-face a horizontal demand curve (perfectly elastic, or same price for each unit)
“Invisible Hand”
-Adam Smith
-Guided to achieve a result that might not have been intended
“Spontaneous order”
-Michael Polanyi
-equilibrium in a perfectly competitive market is achieved through interactions of many consumers and firms without any centralized decision making
Profit max requires…
MR=MC!!!!!!!!!!!
Profit
Total revenue-total cost (price x quantity)
Average revenue
Total revenue/quantity
Marginal Revenue
Change in total revenue/change in quantity
In a PCM…
Price=Average revenue=marginal revenue
When MR>MC…
profit increasing
When MC>MR…
profit decreasing
Maximum profit occurs when…
Vertical distance between TR curve and TC curve is as LARGE as possible
or
MR equals MC (or as close as possible)
Loss
Fixed cost
=(ATC-AVC)(Q)
Profit per unit of output
Difference between market price and atc price
Profit=
(P x Q)-TC
Profit is negative when…
Total cost> Total Revenue
Profit and losses
-must minimize losses if not making profit
-loss inavoidable in the short run due to fixed cost
Break-even
Obtaining no profit, but incurring no loss
-when price=average total cost`
Economies of scale
When a firm’s long run average costs fall as it increases output
Diseconomies of scale
When a firm’s LRAC rise as the firm increases output
Constant returns to scale
When a firm’s LRACs remain unchanged as it increases output
Minimum efficient scale
level of output at which all economies of scale are exhausted (when LRAC curve at a minimum
