Chapter 9 - Competitive Markets Flashcards
What is market structure?
Features that affect behaviour and performance of firms in that market
What is market power?
When firms can determine its own price
A market is said to be _ when its firms have little or no market power
Competitive
The more market power the firms have, the (more/less) competitive the market is
Less
What occurs when each firm has zero market power?
A perfectly competitive market
PC when MP = 0
When degree of competition increases, market power (inc/dec)
Decreases
What is competitive behaviour?
The degree to which individual firms vie with one another
MasterCard and Visa engage in _ _ but their market is _ _
Competitive behaviour, not competitive
GM and Toyota engage in _ _ but their market is _ _
Competitive behaviour, not competitive
Two wheat farmers don’t engage in _ _ but they both exist is a _ _ _
Competitive behaviour, very competitive market
What are the 4 assumptions of perfect competition?
- All sell a homogenous (similar) product
- Customers know nature and price of product
- Each reaches min LRAC at an output that’s small relative to the industry’s total output
- Industry characterized by freedom of entry and exit
In a perfectly competitive market, the DC for each firm is _
Horizontal
In a perfectly competitive market, the DC for the industry is _ _
Downward sloping
What does a horizontal DC mean for each firm?
The price will always be the same no matter then change in Q
Give the equation for total revenue (TR)
TR = p x Q
Give the equation for avg revenue (AR)
AR = (p x Q)/Q = p AR = TR/Q = p
Give the equation for marginal revenue (MR)
MR = dTR/dQ = p
Give the equation for profits
TR-TC
Give the equation for total costs (TC)
TC = TVC+TFC
If TR
Economic loss
What happens when a firm produces nothing?
Operating loss = fixed costs
What happens when a firm decides to produce?
Fixed + variable costs
If revenue is less than its variable cost, the firm will (gain/lose) more by producing than by not producing at all
Lose
What are the 2 cases where a firm will not produce?
TR < TVC
AR < AVC
What is the shut-down price?
Equal to the minimum of a firm’s AVC
If MR>MC, _
Produce more q
If MR=MC, _
No incentive to change q
If MR
Produce less q
Profit is maximized when _ = _
MR = MC
For a competitive firm, choose output where _ = _
p = MC
When P > AVC, what occurs (2)?
Firms don’t close
MC = MR (if perfect competition, MC = P)
What is the SC of a competitive firm equal to?
MC curve above the AVC curve
What is the SC of a competitive industry?
Horizontal sum of the MC curves (above AVC)
When P=ATC, _
Profit = 0
When P>ATC, _
Profit > 0
When P
Profit < 0
Entry leads to an (inc/dec) in supply and (inc/dec) in price
Increase, decrease
Exit leads to an (inc/dec) in supply and (inc/dec) in price
Decrease, increase
What are the 3 conditions for LR equilibrium?
- Maximizing profits
- 0 economic profits
- Existing firms are at min LRAC
Old plants are discarded when P _ AVC
< (less than)
What happens when a competitive industry in LR equilibrium experiences a continual decrease in demand? (Firms)
Continue operating as long as production costs can be covered
What happens when a competitive industry in LR equilibrium experiences a continual decrease in demand? (Govt)
Support declining industries to prevent job losses
