Chapter 9 Flashcards
What is a competitive market
One that encompasses a very large number of suppliers, producing a similar or identical product
Is the real market is a monopoly or perfect competition?
Most sectors of the economy lie somewhere between these limiting cases
What is perfect competition?
industry is one in which many suppliers, producing an identical
product, face many buyers, and no one participant can influence the market.
Free exit/free entry
Buyer and seller has full information (For example,
buyers know that the products of different suppliers really are the same in quality.)
What is the goal of competitive suppliers
Profit maximization-they seek to maximize the
difference between revenues and costs.
the difference in price policy in monopoly and competitive market
its actions have no perceptible impact on the
market price for the good or service being traded. Each firm is therefore a price taker—in contrast
to a monopolist, who is a price setter.
How the policy that of price taking is reflected in the demand curve
The demand curve facing individual firm is horizontal at the going market price-infinitely elastic
in perfectly competitive markets, there are 2 demand curves:
One facing the firm and one facing the market
the demand
curve facing the perfectly competitive firm is horizontal, or infinitely elastic. In contrast, the demand curve facing the whole industry is downward sloping.
If the firm’s goal is profit-maximization that what plays a key role
MC
What is marginal revenue
Marginal revenue is the additional revenue accruing to the firm resulting from the
sale of one more unit of output
In perfect competition, a firm’s marginal revenue (MR) is
the price of the good and also marginal cost
What is the optimal quantity supplied by one firm in competitive market
where MC intersects with demand facing individual firm
When firm can cover its variable costs
When p>AVC
What is sunk costs and when business should still run with them
If the firm has sunk its fixed costs, it should stay in production even if it cannot cover all of its costs
MC curve cuts the AVC and ATC at their
minima
in the graph where we can find shut-down point and break-even point, if we have the curves for MC,ATC,AVC
MC and AVC intersection-shut-down point- P1
ATC and MC- break-even point-P3
MC and AVC intersection-shut-down point- P1
ATC and MC- break-even point-P3
What happens between P1 and P3 in the long run and the short run
Between prices P1 and P3, the producer can cover variable, but not
total, costs and therefore should produce in the short run if fixed costs are
‘sunk’. In the long run the firm must close if the price does not reach P3.
Profits are made if the price exceeds P3
What is break-even point
Under that point the producer does not generate any profit
What is shut-down price and break-even price
The shut-down price corresponds to the minimum value of the AVC curve.
The break-even price corresponds to the minimum of the ATC curve
What is the firm’s short-run supply curve
portion of the MC curve above the minimum
of the AVC.
How the industry supply is obtained
by summing the firms’ supply quantities across all firms in the industry.
When does short-run equilibrium occurs in short run
Short-run equilibrium in perfect competition occurs when each firm maximizes
profit by producing a quantity where P = MC, provided the price exceeds the minimum
of the average variable cost
What is normal profit
Reflect the opportunity cost of production
Firms do not operate in the long run if they cannot make normal profits
What is supernormal/economic profits
Profits above normal profits that induce firms to enter an industry
P>ATC
Long-run equilibrium for industry supply
P=minimum ATC
What profits will determine number of firms in the market
economic profits rather than accounting profits will determine the
equilibrium number of firms in the long term
Profit per unit on the graph
At the price PE, a profit-making firm supplies the
quantity qE, as determined by its MC curve. On average, the cost of producing each unit of output,
qE, is defined by the point on the ATC at that output level, point k. Profit per unit is thus given by
the value (m−k) – the difference between revenue per unit and cost per unit.
How far will the price fall, and how many new firms will enter this profitable industry?
A long-run equilibrium in a competitive industry requires a price equal to the minimum
point of a firm’s ATC. At this point, only normal profits exist, and there is no
incentive for firms to enter or exit.
In the long run perfect competition ensures ____
That economic profits are zero
The equilibrium long-run price equals to
minimum of the LAC
What is long-run industry supply
Industry supply in the long run in perfect competition is horizontal at a price
corresponding to the minimum of the representative firm’s long-run ATC curve
How will look LR industry supply if the industry has increasing/decreasing costs
Increasing- higher horizontally than constant cost LR supply and up in the end
The opposite for decreasing
How the cost structure of many goods has been reduced
outsourcing to lower-wage economies.
Globalization reduces ___
The cost of components
What are intermediate goods
components are produced in numerous low-wage
economies, imported to North America and assembled into computers domestically. Such components
are termed intermediate goods.
