Chapter 9 Flashcards
Master Chapter 9
Perfect Competitive Markets have 4 characteristics
- The industry is fragmented.
- Firms produce undifferentiated products.
- Consumers have perfect information about prices
- The industry is characterized by equal access to resources.
1st characteristics of Perfect Competitive Markets “1. The industry is fragmented. “
Industry consists of many small buyers and sellers, one of the characteristics of a perfectly competitive industry. Each buyer purchases so small that they have an imperceptible effect on market price
Each sellers input purchases are so small they they have an imperceptible impact on input prices.
2nd characteristics of Perfect Competitive Markets “2. Firms produce undifferentiated products.”
Consumers percieve the products to be indetical no matter who produces them. Products that consumers percieve as being indetical; as long as they get the best prices
3rd characteristics of Perfect Competitive Markets “Consumers have perfect information about prices “
Full awareness by consumers of the prices charged by all sellers in the market, consumers have perfect info about prices all sellers in market charge.
4th characteristics of Perfect Competitive Markets “The industry is characterized by equal access to resources.”
A condition in which all firms (those in industry and prospective entrants) have access to the same technology and inputs. Firms can hire inputs, such as labor, capital, materials, as they need them, and can release them from employment when they do not need them
The 4 characteristics of Perfect market have 3 implications for how the markets work, what are they?
- The market is fragmented: implies that sellers and buyers act as price takers. A seller or buyer that takes the price of the product as given when making an output decision (for seller) or a purchase decision (for buyer)
- 2nd and 3rd (firms produce undifferentiated products and consumers have perfect info on prices): implies a law of one price. The occurrence of all transactions between buyers and sellers at a single, common market price. Consumers will purchase at lowest price.
- 4th (equal access to resources): implies the industry is characterized by free entry: if it’s profitable for new firms to enter the industry, they will eventually do it. Firms have access to same techn and inputs that existing firms have.
Economics Profit vs Accounting Profit? What is Profit maximization?
Economic profit = Sales Revenue - Economic Costs (Including all relevant opportunity costs)
Accounting profit = Sales Revenue - Accounting Costs
Profit Max = Economic Profit Max
Profit Max = Price-taking firm maximizes its profit when it produces a quantity Q at which the MC = Market Price
What is Economic Value Added (EVA)?
Starts with a company’s accounting profit and deducts the minimum return on invested capital demanded by the firms investors.
What happens with a positive EVA and a negative EVA?
Positive EVA = The market value of the firm, as reflected in its share price, will exceed the investments made in the firms assets
Negative EVA = The market value of the firm will be less than the investment cost of its assets
Break down: π = TR(Q) - TC(Q)
π = Economic Profit
TR(Q) = Total Revenue derived from selling quantity Q, TR(Q) = P x Q
TC (Q) = Total ECONOMIC cost of producing quantity Q.
Marginal Revenue?
Δ TR / Δ Q , for a price-taking firm, each additional unit sold increases total revenue by amount equal to market price
Δ TR / Δ Q = P
Price taking firm, MR is = market price
MR = P
Marginal Costs?
MC = ΔTC / Q
Requirements in the short-run?
- The number of firms in the industry is fixed, 2. At least one input, such as the plant size (quantity of capital or land) of each firm, is fixed.
Market for fresh cut roses: Fixed amount of land, Fixed quantity of greenhouses, and fixed quantity of rose bushes
How does someone obtain a market supply curve?
Add together the short-run supply curves for all of the producers currently in industry
Break down the following: STC (Q) = SFC + NSFC + TVC(Q)
This is the firms short-run total cost of producing a quantity of output Q.
TVC(Q) = Total Variable Cost, Output-sensitive costs, include material cost and costs of certain kinds of labor (factory labor). NONSUNK COSTS = 0 if output 0
SFC = Sunk Fixed Costs, Fixed Costs that firm cannot avoid if it temporarily suspends operations and produces zero output. UNAVOIDABLE COSTS. 5 year long-term lease to rent land. Lease cost is FIXED, does not vary with quantity of roses that firm produces. Output-Insensitive. SUNK as firm cannot avoid rental payments even if 0 output.
NSFC = NonSunk Fixed Costs, must be incurred if the firms is to produce any output, does not have to be incurred if produces no output. AVOIDABLE COSTS. Cost of heating the greenhouses. Constant temperature for greenhouse even if grows 10 or 10,000 roses. Nonsunk because they can be avoided if grower chooses 0 roses.
