Chapter 8 Flashcards
The Four Major Market Structures
- Perfect competition
- Monopolistic
competition - Oligopoly
- Pure monopoly
Perfect Competition
a market with many buyers and
sellers, all selling a homogeneous product
A perfectly competitive firm is called a…
Price Taker
A perfectly competitive firm must sell at the price
determined by…
Market supply and demand
What is total revenue (TR)?
Total revenue (TR) is the revenue that the firm receives
from the sale of its products.
TR = p x q
Profit is maximized at the output level where
MR = MC
At a lower quantity, the firm sacrifices potential profits
because
MR > MC
At a higher quantity, the firm incurs losses on each
additional unit because…
MC > MR
Average revenue is…
Total revenue divided by the quantity
sold
Marginal revenue is…
The change in total revenue from the
sale of an additional unit of output
MR = ∆TR/∆q
The profit-maximizing output level is found by…
equating
MR = MC at q*
If at q* the firm’s price is greater than its ATC, it is making an…
Economic Profit
If at q* the price is less than ATC, the firm is incurring an…
economic loss
If at q* the price is equal to ATC
the firm is making zero
economic profits
As market price rises, the output decisions of a competitive firm
evolve from
- Not producing at all (shutting down),
- To operating at an economic loss,
- To economically breaking even,
- To generating an economic profit.
Economic profits signal…
Resources to flow into the industry
Economic losses signal…
Resources to leave the
industry
In a constant-cost
industry…
prices of inputs do not change as
output changes
Perfect competition requires…
A firm to operate at the
minimum of its ATC
Perfect competition generates…
productive efficiency
Productive efficiency is…
where goods and
services are produced at the lowest possible cost
Perfect competition long-run equilibrium achieves…
- Productive efficiency (production at lowest possible cost).
- Allocative efficiency
(P = MC). - Production allocated to reflect consumers’ wants.
