chapter 8 perfect competition Flashcards
industry
group of producers
market
interaction of producers
perfect competition characteristics
numerous sellers
identical products
easy entry
no control over price
how is price determined for perfect compettion
-buyers and sellers both price takers
when Supply= Demand the equilibrium price is the price of the product
what conditions must be met in order for it to be perfect competition ( not the same as characteristics)
- numerous buyers/ sellers
- consumers dont have preference
- easy entry and exit from market
- producers have all necessary info to make decisions
average revenue
amount of revenue per one unit sold
tr/q
also the same as price= MR
total revenue
Px Q
or MR x Q
or ARxQ
** not profit just how much firm makes from selling units
Marginal Revenue **
extra revenue from producing one more unit
MR = change in TR/ change in quantity
MR=P=AR IN PERFECT COMPETITION
total profit
T(pi)= TR-TC ** talking about economic profit
break even output
level of output that sales revenues just cover the fixed and variable costs
** normal profit is a part of costs
so at break even revenue there is zero economic profit
Total profit= zero, TR=TC
MIN AC AT BREAK EVEN POINT
min ac at what
break even point
margins
change after increasing by one unit
mr greater than mc
produce more mr curve is above mc curve, therefore you have not reached max profit, produce more to reach mac profit where MC=MR
Marginal profit
**maximized when MR=MC
change in total profit divided by change in quantity
or MR-MC
why is total profit maximized when marginal profit equals zero ( explanation )
as you near MR=MC, the total profit may be increasing or decreasing but the marginal profit will be above zero. when marginal profit equals zero the total profit has not increased or decreased at all therefore it is at the max amount that it can get to.. – the profit cannot increase anymore at this point after that marginal profit starts to decrease, below zero, although there still may be economic profit, total profit would be above zero its not at its max amount
what to do if Q not a whole number when MR=MC
do not round up – max profit will occur when MR slightly larger than MC rather than when MC is slightly larger than MR so choose the smaller quantity
average cost
tc/q
average profit
total profit/ q WHICH IS EQUAL TO PRICE
P= (in perfect competition)
MR
AR
(and MC when profit is maximized)
TR=
PxQ
MRxQ
ARxQ
TC=
ACxQ
T(pi)=
TR-TC
A(pi)xq
MR=
delta q
MC=
delta q
M(pi)=
MR-MC
delta T(pi) ------------- delta q
which values do you need to know to max total revenue ( the important ones)
MR, MC and TC
break even point ( on graph)
MIN AC -
total profit = zero
MR hits min AC
TR=TC
break even price
price at which firm only makes normal profit
shut down point
if production is less the avc (average variable cost) - then firm must shit down or produce zero units so lost is only fixed cost
– MR = min avc at shut down point, if mr is lower than AVC then you make zero units to have a SMALLER loss
supply curve
increase price increases level of production (quantity) where MR=MC-in order to maximizer profit therefore the supply curve above the shutdown point is known as the MC CURVE
long run Total profit above zero
economic profit occuring= more people enter market– increase supply– decrease price– MR= min ac now total profit= zero
- firms continue to enter market until until economic profit zero
- in long run the perfectly competitive firm will always have zero economic profit
long run total profit below zero
firms are at shutdown point so some will – decrease in supply — increase price — until break even point reached and total profit at zero again
- firms continue to leave market until economic profit is zero
- in the long run perfectly competitive firm will always have zero economic profit
how much economic profit does perfectly competitive firm have in the long run?
zero
increasing cost industry
industry grows resulting in cost of production/ resources increase
long run supply curve upward sloping
price increases as industry grows – supply of resources and production is increasing
constant cost industry
-price of production/ resources is constant while industry expands – long run supply curve is a straight line
decreasing cost industry
- prices of resources/ production fall while industry expands– resource supplier may be experiencing economies of scale (ex electronic industry)
the long run supply curve slopes downwards - as quantity or industry increases the price of the resources decreases
