Chapter 9 Flashcards
Perfectly competitive Market
market structure in which a very large number of firms produce a standardized product
Monopoly
market structure in which one firm is sole seller of g/s
monopolistic competition
market structure in which a relatively large number of firms produce differentiated products
Oligopoly
market structure in which a small number of large firms produce standardized or differentiated products, firms affected by rivals decisions when determining P and Q
Perfectly competitive Market
- # of firms
- type of product
- control over price
- conditions of entry or exit
- Non price competition
- examples
- very very large number
- standardized (homogenous-exact same product)
- none
- easy entry or exit with no obstacles
- none
- foreign exchange, agriculture, cotton
Monopolistic Competition
- # of firms
- type of product
- control over price
- conditions of entry or exit
- Non price competition
- examples
- many
- Differentiated (similar with substitution)
- some but within narrow limits
- relatively easy
- emphasis on advertising
- retail, clothing, shoes
Oligopoly
- # of firms
- type of product
- control over price
- conditions of entry or exit
- Non price competition
- examples
- few
- Standardized or Differentiated
- mutual interdependence, much w/collusion
- significant obstacles
- great deal with product differentiation
- steel, automotive, farm capital
Monopoly
- # of firms
- type of product
- control over price
- conditions of entry or exit
- Non price competition
- examples
- One
- Unique, no substitutes
- considerable amount
- blocked
- emphasis on public relations advertisement
- Utilities ex manitoba hydro, winnipeg jets, water supply
Perfect Competition Characteristics (4)
very large number of firms, price takers, standardized product, easy entry and exit,
very large number of firms means there are lots of ___firms.
small
what is price taker
industry that have no control over market price so they sell product at given market price
what does it mean for perft.comp firm to have easy or exit in long run and how does entry and exit occur
profits attract entry, losses gives rise to exit, no barriers prohibiting entry or exit.
The demand for an individual firm that is perfectly competitive is
perfectly elastic
why is the demand of perfectly comp firm perfectly elastic
firms are price takers, firms cannot increase or decrease price, firms can only sell if they produce at the market price
why can’t this firm increase or decrease price
all other firms in the industry would be selling the good at that level so a consumer would not buy a over priced product and decreasing price would create losses, no need to sell lower as market is higher
perfectly comp firm
- Average revenue equation
- marginal revenue equation
- total revenue equation
- total revenue divided by output = price of good
- change in revenue divided by change in output = price of good
- price x quantity
Short Run Maximization of Profit Objective and how they can achieve this
firms want to either maximize economic profit or minimize economic loss can do this by adjusting its own output.
two approaches to identifying profit maximization quantity
- total revenue - total cost approach
2. marginal revenue - marginal cost approach
3 decisions of firms when deciding to produce using TR-TC approach
- produce or not produce
- what quantity to produce
- will I achieve economic profit or a loss
TR-TC approach, finding quantity to produce at from a table
produce where profit or loss is the highest number POSSIBLE ex can be highest positive or smallest negative number
Break Even Point (2)
TR=TC
normal profit=accounting profit therefore no economic profit
Normal Profit
what firm or someone could make in another industry
profit maximization TR-TC Approach from Graph
find the greatest vertical distance between the TR curve and the TC curve
economic profit equation
TR-TC
why do total cost increase overtime
increase with output as more production=more materials and costs
describe TC of perfect com firm
starts increasing at a decreasing rate as output increase, when output is to large it increases at an increasing rate
MR(=P) = MC table approach (2)
- Produce the quantity units where last MR is just greater then MC, do not produce if MC>MR for first 2-3units
- check if P > or equal to Average variable costs
3 questions a producer has when the deciding to produce using MR-MC approach
- Should I produce
- Is MR > MC
- is P > or equal to AVC
When does a firm shut down
if P < AVC
MR-MC graphical approach (3)
find where MR=MC, then see if P > AVC, then calculate profit using TR-TC or Q(P-ATC)
Loss minimizing rule
find where MR=MC (graph) or last MR > MC (table) Loss would occur if profits are negative but less then TFC.
AVC < P < ATC
In a scenario where losses is the profit and
ATC > P > AVC Why minimize losses and not shut down?
in long run if they produced nothing their TFC is their loss but if they produce output, their profit is a loss but is less then what they would pay if they didn’t produce, they can still cover variable cost and use remaining to subtract from TFC
Shutdown Case of firms
same steps as before in this scenario P < AVC so firm cannot cover materials, their loss is now greater then what it would be if they didn’t produce (-profit>TFC)
What is a the market short run supply curve in perfectly comp industry (slide 23,24)
since we produce where MR=MC or MR>MC, it is the MC curve that equals AVC and the rest above AVC
Shifts of the MC (market short run supply curve) (3)
change in price of variable inputs
increased technology
change in price of wages
MC Law of Diminishing returns
MC eventually rises as output increases due to decrease in efficiency so market needs to charge higher price to increase output
Firms don’t produce if
MR=P < AVC
As the price of product sold in the market increases
law of supply
quantity of output increases
p=avc at MR=MC describe firm indifference
firm indifferent as result is same as not producing but we say they produce as output attracts consumers
AVC < p < ATC
firms produced quantity to minimize short run costs and their economic profit is negative number
P>ATC
Firm makes economic profit
