Chapter 12 Flashcards
Four conditions that define a perfectly competitive market are:
1) The existence of standardized product
2) Price taking behaviour on the part of firms
3) Perfect long-run mobility of factors of production (Free entry and exit for firms)
4) Perfect information on the part of consumers and firms
Economic profit
Difference between total revenue and total cost, taking account of EXPLICIT and OPPORTUNITY COSTS
Normal profit
The opportunity cost of resources owned by the firm
Normal profit ______economic profit but _______ of accounting profit
Does not take a part in, does take a part in
Marginal revenue MR
The change in TOTAL REVENUE that occurs as a result of a 1-unit change in SALES (equal to the slope of the TOTAL REVENUE CURVE)
Economic profit is
TR-TC and is denoted as capital pi Q
(Price - AVC)•Q - FC
To maximise economic profit the should should follow this rule:
•Provided P_0 (price of output per unit) is larger than the minimum value of AVC
•the firm should produce a level of output for which the marginal revenue (which is equal to P_0) is qual to the marginal cost on the RISING portion of the MC curve
Shutdown condition
If price falls below the minimum of average variable cost, the firm should shut down in the short run
Two rules that define the short run supply curve of the perfectly competitive firm
(1) that price must equal marginal cost on a rising portion of the marginal cost curve
(2) that price must exceed the minimum value of the average variable cost curve
Marginal cost curve is upward sloping is a direct consequence of
The law of diminishing returns
At the equilibrium price price sellers…
Are selling at the quantity they wish to sell
and buyers are buying the quantity they wish to buy
Allocative efficient
A condition in which all possible gains from exchange are realised
Allocative efficiency implies
That competitive markets lead to Pareto efficiency
Pareto efficient
A Outcome where it is not possible to make some person better off without harming another person
Producer surplus
The monetary amount by which a firm benefits by selling output
What Is the area under the MC curve equal to?
The variable cost
For industries whose firms have U shaped long run AVG cost curves
Entry
Falling prices
And capital stock adjustment will continue until :
•Price reaches the minimum point on the LAC curve
•All firms have moved to the capital stock size that gives rise to a short run AVG total cost curve that is tangent to the LAC curve at its minimum point
Pecuniary diseconomy
A rise in production cost that occurs when an expansion of industry output causes a rise in the prices of inputs
Competitive industries in which the rising input prices lead to upward sloping supply curves are called
increasing cost industries
Competitive industries in which falling input prices lead to downward-sloping supply curves are called
decreasing cost industries
Price elasticity of supply
The percentage change in quantity supplied that occurs in response to a 1% change in the product price
How to calculate price elasticity of supply???
Suppose we are at point (Q,P) on the industry supply curve, the price elasticity of supply is given by :
(Delta Q/Delta P)*(P/Q)
OR
(P/Q) * (1/slope)
