chapter 8 Flashcards
what are the 3 indicators of a perfect competitive market?
price taker
product homogeneity
free entry (or exit)
what is price takers?
in a perfectly competitive market each individuals firm sells a sufficiently small portion of total market output that its decisions have no impact on market price
what is product homogeneity?
when the products of all of the firms in a market are perfectly substitutable with one another, that is, when they are homogeneous no firm can raise the price of its product above the price of another firms without losing most or all business because people will just buy the same product elsewhere for cheaper
what is free entry (or exit)?
condition under which there are no special costs that make it difficult for a firm to enter or exit an industry,
with free entry and exit, buyers can easily switch from one supplier to another and suppliers can easily enter or exit a market
what is profit?
the difference between total revenue and total cost
what is the formula for profit?
profit= revenue (q) - cost (q)
what output would a firm choose to maximize profit?
the output quantity that has the largest cost between revenue and cost (MR=MC)
what is the slope of the cost curve?
marginal cost
what is the cost of the revenue curve?
marginal revenue
what is the profit maximizing condition?
MR=MC=P
how would a company maximize profit in the short run?
they maximize their profit by choosing an output q at which its marginal cost (MC) is equal to the price (P) or marginal revenue (MR) of its product
if a firm produces more or less than their optimal q, how will that impact profits?
they will be losing profits, if they produce less than optimal q they can make more profits if they produced more and if they made more than they are losing profits by spending more to make less
when should a competitive firm shut down due to not making enough profits?
if the price is below the average variable cost
if the price is above average variable cost, how would a firm react?
they would still continue to produce
how does a firm know how much out put (q) to produce?
typically they will produce where price intersects with marginal cost
in the short run, what is the least that a firm can produce?
where price is equal to average variable cost and they can cover their variable cost
how is the supply curve derived from the average variable cost curve?
the supply curve begins where the marginal cost curve is above the average variable cost curve
how can you find producer surplus with a marginal cost curve?
the area below the price and the marginal cost curve (refer to slide 9 in profit maximization)
how can you find producer surplus with a supply curve?
the area below the price level and the supply curve (refer to slide 10 profit maximization)
if all firms in a market are maximizing profit ,do any firms have an incentive to enter or exit?
no they do not because the market is in equilibrium
what are the 3 conditions that must hold for a long run competitive equilibrium?
1) all firms in the industry are maximizing profit
2) no firm has an incentive to either enter or exit the industry because all firms are earning zero economic profits
3) the price of the product is such that the quantity supplied by the industry is equal to the quantity demanded by consumers
if new firms entering a market realize they can still make a profit by selling it for less than the market price, how will that impact supply?
the supply curve will shift to a new equilibrium price, q demanded and q supplied (refer to slide 12 profit maximization)
