CHAP. 9 Flashcards
WHAT IS THE MARKET STRUCTURE
All the features of a market that affect the behaviour and performance of firms in that market
EX:
the number and size of sellers
the extent of knowledge about one another’s actions
the degree of freedom of entry
the degree of product differentiation
WHEN DO FIRMS HAVE MARKET POWER
When they can influence the price of their product
WHAT IS A COMPETITIVE MARKET
A market is said to be competitive when its firms have little or no market power
PERFECTLY COMPETITIVE MARKET : When firms have zero market power
WHAT DOES COMPETITIVE BEHAVIOR REFER TO
Refers to the degree to which individual firms actively vie with one another for business
WHAT ARE SOME ASSUMPTIONS ABOUT PERFECT COMPETITION
–All firms sell a homogeneousproduct.
–Customers know the nature of the product being sold and the prices charged by each firm.
–The level of each firm’s output at which its long-run average cost reaches a minimum is small relative to the industry’stotal output.
–The industry is characterized by freedom of entry and exit
INDIVIDUAL FIRMS
Are price takers because an increase in the industrys output has a negligeable effect, that it can be ignored
Individual firms face horizontal demand curves
WHAT IS THE TOTAL REVENUE IN COMPETITVE MARKET, WHAT IS AVERAGE REVENUE, WHAT IS MARGINAL REVENUE
The total amount received by the firm from the sale of a product
TR= p×Q
The amount of revenue per unit sold
AR= (p×Q)/Q= p
The change in a firm’s total revenue resulting from a change in its sales by one unit.
MR= change in TR/ change in Q= p
For a competitive price-taking firm, the market price is the firm’s marginal (and average) revenue
WHAT IS A FIRMS OBJECTIVE
To maximize profits
Profits = TR−TC
HOW TO DETERMINE IF A FIRM SHOULD PRODUCE
If revenue is less than its variable cost, the firm will lose more by producing than by not producing at all
So
*A firm should not produce at all if, for all levels of output, total revenue is less than total variable cost.
*The firm should not produce at all if, for all levels of output, the market price is less than average variable cost.
WHAT IS THE SHUT DOWN PRICE
The price that is equal to the minimum of a firm’s average variable costs
At prices below this, a profit-maximizing firm will produce no output
HOW DOES A FIRM DECIDE HOW MUCH TO PRODUCE
If any unit of production adds more to revenue than it does to cost, producing and selling that unit will increase profits
So
A unit of production raises production if the marginal revenue obtained from selling it exceeds the marginal cost of producing it
PROFIT MAXIMIZING: When MR = MC
THE SUPPLY CURVE IN COMPETITIVE MARKETS
The part of MC that is superior to AVC
In perfect competition: the industry supply curve is the horizontal sum of the marginal cost curves (above the level of average variable cost) of all the firms in the industry
WHAT IS THE SHORT-RUN EQUILIBRIUM
Quantity demanded equals quantity supplied, and each firm is maximizing its profits given the market price
When the industry is in equilibrium a firm can be making losses, profits or breaking even
WHAT DETERMINES ENTRY AND EXIT OF FIRMS
–If existing firms are making positive economic profits, new firms have an incentive to enter the industry.
–If existing firms are making zero profits, there are no incentives for new firms to enter, and no incentives for existing firms to exit.
–If existing firms are making economic losses, there is an incentive for existing firms to exit the industry.
WHAT IS THE EFFECT OF ENTRY ON THE MARKET
1.Positive profits attract new firms.
2.Entry leads to an increase in supply. The market supply curve shifts rightward and the price falls.
3.Entry stops when all firms are just covering their total costs
