Chapter 7 Flashcards
What is the affect of competition in markets?
Competition in markets often occurs ion the basis of price, quality, location, service and advertising.
What are the characteristics of pure competition?
- Number of sellers- Very large number of independently acting sellers offering their products in large national or international markets
- Standardised product- They produce identical products and perfect substitutes, if the prices are the same consumers will be indifferent about which seller to buy form
- Price takers- No significant control over product price this is as there is a small fraction of the market produced by each firm. The competitive firm cannot change the market price and the demand curve is perfectly elastic
- Free entry and exit - New firms can freely enter and existing firms can freely leave purely competitive industries. As their is no significant legal, technological, financial or other obstacles.
What is pure competition?
In pure competition involves a very large number of firms, standardised product, very easy entry and exit from industry
What is the curve of pure competition?
In pure competition firms have a perfectly elastic demand curve which is the same as the average revenue curve and marginal revenue curve and this is all the same as the price (P=AR=MR).
What is the market demand graph?
Market demand graphs are down sloping curves and an entire industry can still affect price by changing the total output.
What is average revenue in a pure competition?
Pure competition, firm’s demand curve is horizontal and is also its AR curve. The price per unit to the purchaser is also its revenue per unit. AR = TR/Q = P*Q/Q = P that is constant for the firm (price taker)
What is the total revenue in a pure competition?
Pure competition, total revenue is a straight line that slopes upward to the right and is found by multiplying price by the corresponding quantity, TR = P*Q.
What is the marginal revenue in a pure competition?
Pure competition, marginal revenue coincides with the demand curve because the product price is constant and their is a change in revenue from selling 1 more unit of output. MR = ΔTR/ΔQ = Δ(PQ)/ΔQ = PΔQ/ΔQ = P that is constant for the firm.
What are the two approaches in profit maximisation?
Profit maximisation in the short run has two main approaches Total Revenue (TR) - Total Cost (TC) and Marginal revenue (MR) - Marginal cost (MC).
How will a purely competitive firm maximise economic profit?
The purely competitive firm is a price taker and it can maximise its economic profit only by adjusting its output. It can adjust its output only through changes in the amount of variable resources.
What are the different forms of profit maximization seen?
- TR>TC = Supernormal profit;
- TR=TC = Normal Profit.
- TR>TC = loss
How do you calculate total revenue?
TR= P x Q
How do you calculate total cost?
TC= Price at ATC x Q
What is shown on a total revenue- total cost approach?
On a Total Revenue (TR) - Total Cost (TC) the total-revenue curve for a purely competitive firm is a straight line. Total cost increases with output in that more production requires more resources. The rate increase varies with the relative efficiency of the firm.
What is shown on a Marginal Revenue- Marginal cost approach?
On a Marginal Revenue- Marginal cost curve. Total revenue is found when MR= MC at equilibrium and then finding your output and your price on the demand curve TR= P x Q. Total cost is found where the output equilibrium meets the ATC curve then TC= Price at ATC x Q
What will cause a shutdown in a pure competition?
When a business is making a loss in a pure competition firm as long as price is greater than the variable cost then you should remain in business but if its below the firm should shutdown
When should a firm produce any level of output?
The firm should produce any unit of output whose marginal revenue exceeds its marginal cost because the firm would gain more in revenue from selling that unit than it would add to its costs by producing it.
How does the price marginal cost relationship improve?
The price-marginal cost relationship improves with increased production. The profit-seeking producer should always compare marginal revenue with the rising portion of the marginal-cost schedule or curve.
What is loss minimizing?
Wherever price P exceeds average variable cost AVC but is less than ATC, the firm can pay part but not all of it is fixed costs by producing, this is the loss minimizing case.
What will the firms produce in the short run?
In the short run, the firm will maximise profit or minimise loss by producing the output at which marginal revenue equals marginal cost.
How does quantity supplied increase?
Quantity supplied increases as price increases.
When would quantity supplied be zero?
That quantity supplied would be zero at any price below the minimum average variable cost (AVC) and that portion below the MC curve lying above its AVC curve is its short-run supply curve
What is pure monopoly?
Pure monopoly is a market structure in which there is a sole seller of a product or service with no close substitutes, entry and exit is completely blocked so one firm constitutes the entire industry.
What are the characteristics of monopoly?
- Single seller- Single firm is the sole producer or supplier of the product, the industry and firm are synonymous
- Unique product- No close substitutes and the consumer who chooses not to buy the monopolised product must do without it.
- Price maker- The monopolist controls the total quantity supplied and has considerable control over price. The monopolist faces the usual downward-sloping product demand curve.
- Blocked entry- No immediate competitors. However there are economic, technological, legal or other types of barriers.
- Non-price competition- When standardised products, monopolists engage mainly in public relations advertising. When standardised product, sometimes they also advertise their product’s attributes
