Chapter 7 Flashcards
What is market structure based off of?
number of firms, standard or differentiated product, ease of entry
Formula for total revenue
TR= P x Q
Formula for average revenue
AR= TR/Q= P
Formula for marginal revenue
MR= change in TR/ change in Q= P
What is marginal revenue?
additional revenue that firm receives by producing one more unit of output
Formula for economic profit
= (P- change in TC) Q
What does the demand curve look like for a purely competitive seller?
horizontal line, can sell as much output as it wants with current market price (D=P=MR=AR)
Definition of short -run profit maximization
a price-taking firm maximizes its economic profit by adjusting its output quantity (only through change in amount of variable inputs used)
What should a firm compare to max out profit?
marginal revenue and marginal cost
Where is the break even point for a perfectly competitive firm on the short-run supply curve?
where ATC and MC intersect
where is the shut down point for a perfectly competitive firm on the short-run supply curve?
where AVC and MC intersect
Basic assumptions for profit maximization in the long-run of a perfectly competitive firm(3)
1) entry and exit only
2) identical costs for all firms
3) constant-cost industry (entry and exit of firms do not effect resource prices)
Basic results for profit maximization in the long-run of a perfectly competitive firm (3)
1) entry eliminates economic profit: firms enter, supply increases, and price falls
2) exit eliminates economic losses: firms exits, supply decreases, price rises
3) after all long-run adjustments are completed in a purely competitive industry, product price with be EQUAL TO the firm’s ATC and production will occur at the firm’s minimum ATC curve.
Long-run supply curve for constant-cost industries
entry and exit do not affect resource prices and thus, do not affect long-run ATC of individual firms
Long-run supply curve for increasing-cost industries
entry (exit) increases (decreases) resource prices and thus increases (decreases) long-run ATC of individual firms
Long-run supply curve for decreasing-cost industries
entry (exit) decreases (increases) resource prices and thus decreases (increases) long-run ATC of individual firms
Number of firms in a perfect competition market structure
many
number of firms in a monopolistic competition market structure
many
number of firms in an oligopoly market structure
few
Type of product in a perfect competition market structure
same
Type of product in a monopolistic competition market structure
different
Type of product in an oligopoly
same or differentiated
Type of product in a monopoly
unique
Price setting power in perfect competition
None (price taker)
Price setting power in monopolistic competition
Some
Price setting power in an oligopoly
limited (more collusion)
Price setting power in a monopoly
Major
Non-price competition in perfect competition
none
Non-price competition in monopolistic competition
ads, brands
Non-price competition in an oligopoly
major
Non-price competition in a monopoly
PR only
Which market structure has both productive and allocative efficiency?
perfect competition
Is there a long-run profit in pure competition?
no
Is there a long-run profit in monopolistic competition?
no
Is there a long-run profit in an oligopoly?
It is likely
Is there a long-run profit in a monopoly?
yes
When will short-run profit be positive or negative?
Profit if AR>ATC
Profit if P>ATC
Where will all firms produce in the short run?
where MR=MC
Where will competitive firms product in the short-run?
Where P=MC
What is the triple equality?
P=MC=Min ATC
Where does the triple equality hold true?
Only in constant-cost and increasing-cost industries
Why doesn’t the triple equality hold true for decreasing-cost industries?
Because MC always remains below ATC if average costs are decreasing
When is there allocative and productive efficiency in pure competition?
When the economy is composed of increasing-cost or constant-cost industries
How do consumers benefit from productive efficiency?
By paying the lowest product price possible
When does allocative efficiency occur?
When it is impossible to produce any net gains for society by altering the combination of goods and services that are produced from society’s limited resources
