CH8: Market Structures Flashcards
What are the characteristics of a monopoly?
One seller, no close substitutes, and blocked entry.
What is the profit-maximizing condition under any market structure?
Marginal Revenue (MR) = Marginal Cost (MC). / Profit is maximized (or losses minimized).
Why is the long-run average cost (LRAC) curve smooth in theory?
Because it envelops an infinite number of SRAC curves.
how is a monopolist constrained in setting price?
By the downward-sloping market demand curve.
how is the market supply curve derived?
By summing all firms’ individual supply curves horizontally.
in perfect competition
what is the relationship between AR, MR, and Price?,AR = MR = Price.
should a firm with ar < ac but ar > avc shut down?
No. It should continue in the short run to cover some fixed costs.
should a firm with ar < avc shut down?
Yes. It should shut down immediately in the short run.
under perfect competition
how does a firm maximize profit?,By producing the quantity where P = MC.
what are the four standard market structures?
Perfect competition, monopoly, monopolistic competition, and oligopoly.
what does perfect competition assume about price control?
Firms are price takers; they cannot influence market price.
what does the firm’s demand curve look like in perfect competition?
Horizontal (perfectly elastic) at the market price.
what happens when firms earn economic profits in the short run?
New firms enter the market, increasing supply and lowering price.
what happens when firms incur losses in the short run?
Firms exit the market, reducing supply and increasing price.
what is the firm’s supply curve under perfect competition?
The portion of its marginal cost (MC) curve above AVC.
what is the long-run equilibrium condition when economies of scale exist?
P = SRMC = SRAC = LRAC
what is the shut-down rule in the long run?
Produce only if total revenue ≥ total cost.
what is the shut-down rule in the short run?
Produce only if total revenue ≥ total variable cost or if price (AR) ≥ AVC.
what should a firm do if mr > mc?
Increase output.
when does a firm break even (normal profit)?
When AR = AC.
when does a firm earn economic profit under perfect competition?
When AR > AC.
when does a firm incur an economic loss?
When AR < AC.
when is long-run equilibrium reached in perfect competition?
When P = MC = AC and only normal profits are earned.
why does the supply curve slope upward?
Due to increasing marginal cost, which results from diminishing marginal returns.
why is marginal revenue (mr) less than price for a monopolist?
Because lowering price to sell more affects all units sold.
why would a firm expand its scale of production?
To realise economies of scale and reduce average cost.
