Chapter 10 Flashcards

Pure Competition in the Short Run

1
Q

Four Market Models

A

Pure competition
Pure monopoly
Monopolistic competition
Oligopoly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Pure Competition: Characteristics

A

Very large numbers of sellers
Standardized product
“Price takers”
Easy entry and exit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

standardized product (Pure Competition: Characteristics)

A

is a product for which all other products in the market are identical and thus are perfect substitutes. The consequence of this is that buyers are indifferent as to whom they buy from.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Price takers (Pure Competition: Characteristics)

A

are sellers that have no pricing power; in other words, they do not have the ability to price their product.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Easy entry and exit (Pure Competition: Characteristics)

A

means that there are no obstacles to entry or to exit the industry.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Perfectly elastic demand

A

means that firm has no power to influence price so the firm merely chooses to produce a certain level of output at the price that is given.

The demand curve is not perfectly elastic for the industry; it only appears that way to the individual firm, since they must take the market price no matter what quantity they produce. The firm faces a perfectly elastic demand because each individual firm makes up such a small part of the total market and the goods are perfect substitutes. Note that this perfectly elastic demand curve is a horizontal line at the price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Average revenue

A

Revenue per unit
AR = TR/Q = P

When a firm charges the same price for each unit of output, the ____ ____ is just the price of the good

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Total revenue

A

TR = P X Q

refers to the total amount of money that the firm collects for the sale of all of the units of their good.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Marginal revenue

A

Extra revenue from 1 more unit
MR = ΔTR/ΔQ

reflects the additional revenue that the firm will receive by producing one more unit of output. When the firm is deciding how much to produce, the firm considers the _____ _____ in their decision.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Profit Maximization: TR – TC Approach

The competitive producer will ask three questions?

A

Should the firm produce?
If so, in what amount?
What economic profit (loss) will be realized?

When looking at profit maximization there are essentially 3 questions that the firm must answer. The first question is whether or not the firm should produce at all in the short run. In the short run, the firm should shut-down under certain circumstances. If it has been determined that the firm should produce in the short run, then the firm must determine how much to produce. Lastly, based on the answers to the first two questions, it is necessary to calculate the profit or loss for the firm. Part of the profit-maximization rule is producing an output that minimizes losses in the short run when that is the best option.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Loss-Minimizing Case

A

Loss minimization
Still produce because MR > minimum AVC
Losses at a minimum where MR = MC
Producing adds more to revenue than to costs

In the short run the firm only has two choices: produce or shut-down. There is not enough time in the short run for the firm to get out of business. Given these options, sometimes the firm will produce, but still make a loss. In these situations, the loss from producing is smaller than the loss if the firm shut-down so this is the firm’s best choice.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Production Question

Should this firm produce?

A

Yes, if price is equal to, or greater than, minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Production Question

What quantity should this firm produce?

A

Produce where MR (=P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Production Question

Will production result in economic profit?

A

Yes, if price exceeds average total cost (TR will exceed TC). No, if average total cost exceeds price (TC will exceed TR).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Production questions to ask following Output Determination in Pure Competition in the Short Run

A

Should this firm produce?

What quantity should this firm produce?

Will production result in economic profit?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

The market equilibrium condition

A

where quantity demanded equals quantity supplied

17
Q

Firm versus Industry: Equilibrium Graph

A

Short-run competitive equilibrium for (a) a firm and (b) the industry. The horizontal sum of the 1000 firms’ individual supply curves (s) determines the industry supply curve (S). Given industry demand (D), the short-run equilibrium price and output for the industry are $111 and 8000 units. Taking the equilibrium price as given, the individual firm establishes its profit-maximizing output at 8 units and, in this case, realizes the economic profit represented by the green area.
Individual firms must take price as given, but the supply plans of all competitive producers as a group are a major determinant of product price.