chapter 9: perfect competition Flashcards
what is a monopolist market
market with a single supplier
ex: hydroquebec
PRICE SETTER
perfectly competitive markets
have a very large amount of small suppliers of an identical product
many buyers present
nothing influences the market
each firm recognizes its own small size in the total market
it recognizes that its actions have no real impact on market price
they are PRICE TAKERS
where do real life markets lien the economy?
in between the extremes of èrfect competition and monopoly
profit maximisation
maximizing the difference between revenues and costs
the goal of competitive suppliers
key attributes of a perfectly competitive market
- must be many firms, each one small and powerless relative to whole industry
- product must be standardized
EX: barber shops offering standard service (haircuts)
- buyers have full information on price and quality of product or service
- there are many buyers
- there is free entry and exit of firms
assumes demand curve of each supplier is horizontal and infinitely elastic
demand curve of whole industry is downward sloping
marginal revenue
additional revenue per unit of output sold
In perfect competition P = MR (price is marginal revenue), it is constant
where is the shut down point on a graph
when the MC intersects the AVC
any price below does not cover variable costs, meaning the firm should shut down
No Production
Where
P < min AVC
where is the break even point
when the MC intersects the ATC
profits are made when it goes above
what does it mean when the MC is between the AVC and ATC
producer can cover variable costs but not total costs
should produce in the short run if costs are sunk
in the long run, firm should close if it can’t reach the ATC because all of the costs must be covered
if this is the case, the optimal output is the price at which he can cover variable costs that intersects with the MC
firm’s short run supply curve
portion of the MC curve above the AVC
perfectly competitive suppliers face the choice of how much to produce and supply at given price to maximize revenue
firm’s MC (Marginal Cost Curve in the short run) curve crucial to find out how much is the optimal amount to supply
where does it become the most optimal profit
when the MC is above the ATC
when the MC is lower than the price (revenue) of a unit (and when profits aint negative)
if the MC is bigger than price, might still make profit, but won’t be optimal, eventually, additional cost would exceed revenue
how is the industry supply obtained
summing firm’s supply Q across all firms in the industry
horizontal sum of all firms’ supply curves
it is also the sum of each firm’s MC curve above the shutdown price
short run equilibrium in a perfect competition
occurs when each firm maximizes profit by producing a Q where P = MC
price exceeds the minimum of the average variable cost
may only be temporary, have to find out wether it can be sustained or not (does it make profits)
normal profits
essential part of firms’ operations
reflect opportunity cost of resources used in production
economic profits
above normal profits
induce firms to enter and industry cause it gyuuu (start page 25 if missing info)
what happens when new firms join a new gyu industry
supply increases and shifts to the right
Ep decreases, Eq increases
price is driven eventually where normal profits are made and entry stops
all of this with unchanged demand
how to calculate revenue
difference between revenue per unit and cost per unit
why is long run industry supply horizontal at the price corresponding to the minimum of a typical firm’s long run average cost curve
Free entry ensures that LR economic profits will be zero
If some firms produce at a low cost and others at a higher cost, the latter will not survive in the long run
Only those suppliers choosing the least cost production will survive
This least cost method involves producing at a point where the AC is minimal in the long run – i.e. the min of the LRAC
With zero economic profits this least cost must also be the price
Equilibrium Long-Run Price =
Minimum of Long-Run ATC =
Long-Run Supply Curve
If firms can chose different plant sizes, which size will they chose in the long run?
With many possible plant sizes to chose from, a supplier must chose the least cost one
it corresponds to the minimum of the LRAC
what represents and increasing cost industry
When the costs of individual suppliers rise as the output of the industry increases
ex: landings at major airports
cost for long term curve starts going upwards
In terms of the firm’s LAC: additional suppliers cause it to shift up
what represents and decreasing cost industry
When the costs of individual suppliers fall as the output of the industry increases
long term cost curve starts going downwards
In terms of the firm’s LAC: additional suppliers cause it to shift down
what has increased the minimum efficient scale for many industries
reduction in costs associated with globalization
Globalization has also eliminated many traditional industries
Globalization also reduces the cost of components
efficient market structure
Perfect Competition may represent this
It results in resources being used up to the point where the demand and supply values are equal
If these curves represent true costs and benefits then the equilibrium is efficient
If it is efficient it maximizes the sum of consumer and producer surpluses
