chapter 9 Flashcards
market structure
all features of a market that affect the behavior and performance of firms in that market, such as the number and size of sellers, the extent of knowledge about another’s actions, the degree of freedom of entry, and the degree of production differentiation
market power
the ability of a firm to influence the price of its product
competitive behavior
degree to which individual firms actively vie with one another for business
perfectly competitive market
no need for firms to compete actively with one another bc none has any power over the market;
all firms are price TAKERS
homogeneous product
in the eyes of purchasers, every unit of the product is identical to every other unit
assumptions of perfect competition (4)
- all firms in the industry sell an identical product (homogeneous product)
- consumers know the nature of the product being sold and the prices charged by each firm
- the level of each firm’s output at which its LRAC reaches a minimum is small relative to the industry’s total output (each firm is small relative to the size of the industry)
- the industry is characterized by freedom of entry and exit; that is, any new firm is free to enter and start producing if it so wishes, and any existing firm is free to cease production and leave the industry. Existing firms cannot block the entry of new firms, and there are no legal prohibitions or other barriers to entering or exiting the industry
price taker
a firm that can alter its output and sales without affecting the market price of tis product
what shape is the demand curve of a perfectly competitive firm?
horizontal (variations in the firm’s output have no significant effect on market price)
total revenue
total receipts from the sale of a product
P x Q
average revenue
total revenue divided by quantity sold (TR/Q); market price when all units are sold at the same price
marginal revenue
the change in a firm’s total revenue resulting from a change in its sales by one unit
dTR/dQ
if the market price is unaffected by variations in the firm’s output, what does the firm’s demand curve, average revenue curve, and marginal revenue curve look like?
they all coincide in the same horizontal line
what does it mean when the price equals marginal revenue?
firm is in perfect competition
what kind of factors play a role in the short-run?
- at least one fixed factor
- variable factor inputs change output
what 2 questions to ask for a competitive firm?
- should the firm produce any output at all or would it be better to shut down and produce nothing?
- what level of output should it produce?
when should a firm not produce?
if for all levels of output, total revenue is less than total variable cost OR if the market price (p) is less than average variable costs (AVC)
shut-down price
price that is equal to the minimum of a firm’s average variable costs. at prices below this, profit maximizing firm will shut down and produce no output
if it is worthwhile for the firm to produce at all, the firm should produce the output at which…
marginal revenue = marginal cost
the perfectly competitive firm adjusts its level of output in response to…
changes in the market-determined price
a profit-maximizing firm that is operating in a perfectly competitive market will produce the output that equates to…
marginal cost of production with the market price of its product (as long as p > AVC)
a competitive firm’s supply curve is given by
the proportion of tis marginal cost curve that is above its AVC curve
in a perfect competition, the industry supply curve is…
the horizontal sum of marginal cost curves of all firms in the industry
when an industry is in short-run equilibrium, quantity demanded…
equals quantity supplied, and each firm is maximizing its profits given the market price
short-run equilibrium
for a competitive industry, the price and output at which industry demand equals short-run industry supply, and all firms are maximizing their profits. either profits or losses for individual firms are possible`
when do new firms come about?
when they see profits in a competitive industry
what happens to price when new firms enter an industry?
pushes price down until economic profits fall to zero
when do firms exit an industry?
when there are losses in a competitive industry
what happens to price when firms exit an industry?
market prices are driven up until remaining firms are just covering their total costs
what determines the speed of a firm’s exit from an industry?
the longer it takes for firms’ capital to become obsolete or too costly to operate, the longer firms will remain in the industry while they are earning economic losses
sunk cost
costs that could never be recovered
non-sunk costs
costs that could be recovered by the firm by such means a selling its capital or terminating its rental agreement for its factory
if firms costs are mostly sunk costs…
process of exit in loss-making industries will be slow
