Chapter 8 Flashcards
Optimization Criterion
Marginal Revenue=Marginal Cost
P=
a-bQ
MR=
a-2bQ
Perfect Competitive Market
A market in which (1) there are many buyers and sellers; (2) each firm produces a homogeneous product; (3) buyers and sellers have perfect information; (4) there are no transaction costs; and (5) there is free entry and exit
PC: firm demand
curve
The demand curve for an individual firm’s product; in a perfectly competitive market, it is simply the market price
marginal revenue
The change in revenue attributable to the last unit of output; for a competitive firm, MR is the market price.
Perfectly Competitive Firm’s Demand(what are the 3 things the line equals)
The demand curve for a competitive firm’s product is a horizontal line at the market price. This price is the competitive firm’s marginal revenue. D f = P = MR
Perfectly Competitive Output Rule(general guideline and give the range where it happens)
To
maximize profits, a perfectly competitive firm produces the output at which price
equals marginal cost in the range over which marginal cost is increasing:
P=MC(Q)
Short-Run Output Decision under Perfect Competition(the one with the greater than less than or equal to sign)
To maximize short-run profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P=MC, provided that P > AVC. If P < AVC, the firm should shut down its plant to minimize its losses.
PC: The Firm’s Short-Run Supply Curve
The short-run supply curve for a perfectly competitive firm is its marginal cost curve above
the minimum point on the
AVC
curve,
Long-Run Competitive Equilibrium
In the long run, perfectly competitive firms produce a level of output such that 1. P = MC 2. P = minimum of AC
Example of Perfect Competition
- Agriculture
- software packages
- memory chips
PC: Demand at the Market and Firm Levels
- price is determined by the interaction of buyers and sellers in the market…intersection of the supply and demand curve
- individual firm is small relative to the market, it has no perceptible influence on the market price
- if the firms charged a price even slightly above the market price it would sell nothing
PC:Maximizing Profits happens when?
slope of the cost curve(marginal cost)= slope of the revenue curve(marginal revenue)
How is maximizing adjusted for PC?
its P=MC because
because p=mr
Whats true about the price exceeding average variable cost?
each unit sold generates more revenue than the cost per unit of the variable inputs
When price is below average variable cost?
the firm losses less by shutting down
Profit=
PQ-C
PC Short Run Maximization on a graph
the greatest distance between revenue and cost
PC: The Decision to Shut Down losses equal what
the fixed costs of production
PC: More on Long Run Competitive Equilibrium
- firms are earning zero economic profits;
- there is no way to produce the output at a lower economic cost
Does a monopoly have to be large?
No. you can have a single gas station or movie theater
-it doesn’t just have to be one large firm
Mon: What equal what on the graph?
market demand=firm’s product demand
Do monopoly’s have unlimited power?
No
Mon: How does the monopolist choose between price and quantity?
it can only choose 1
The Patent System
gives the inventor of a new product the exclusive right to sell the product for a given period time
Profit Formula
PQ-C(Q)
Why do PC firms continue to produce in the long-run?
zero economic profits imply that accounting profits are just high enough to offset any implicit costs of production
-the firm earns no more and no less than it could earn by using the resources in some other capacity
How are PC products viewed?
as perfect substitutes
Mon: Having Two Firms in an Industry Leads to Losses but
but a single firm can earn positive profits because it has higher volume and enjoys reduced average costs due to economies of scale
TC=
AC x Q
Two Ways to Address Loss in a Monopoly
- bring cost down
- expand demand
3 ways to have Monopoly
1) patent
2) Ownership of Key Resources
3) Economies of Scale
Natural Monopoly
monopoly that results from economies of scale
How is the long-run situation in perfect competition?
-just enough to cover the average cost of production
Marginal Revenue for a Monopolist
P(1+E/E)
Profits of a Monopolist
Revenue: R(Q)-C(Q)
