Dynamics Of Perfect Markets Flashcards
What is a market
An institution or mechanism that brings together the buyers and sellers of a good or a service
What is Marginal Cost and give the formula
The amount by which the total cost will increase when one extra unit of a product is produced
Change in Total Cost / Change in Output = MC
What is Marginal Revenue and give the formula
The extra amount of income earned when an additional unit of a product is sold
Change in Total Revenue / Change in Qauntity = MR
What are the two formulas for average cost
Fixed Cost + Variable Cost = AC
Total Cost / Total Output = AC
Also called unit cost
What is Average revenue and give the formula
The amount the enterprise earns for every unit sold
Total Revenue / Output = AR
What is another term for average revenue and why can we say this
Total Revenue = Price x Quantity
Average Revenue = Price x Quantity / Quantity
Therefore Average Revenue = Price
What is Average Variable Cost and what is its formula
Variable cost divided by number of units produced
Variable Costs / Total Output = AVC
What is Price
A value that will purchase a definite quantity, weight, or other measure of a good or service
What is Quantity
The extent, size, or sum of countable or measurable objects, expressed as a numerical value
Describe Perfect Competition
Market Structure with a large number of participants who are all price takers, there are no entry or exit barriers in the long run, all information is available to both buyers and sellers and a homogenous product is sold
What are three examples of perfect competition
Stock Exchange
Central Grain market
Foreign currency market
What do we mean by businesses being impersonal
Businesses strive towards maximum profit and only take its own cost structure into account when determining production levels
They are price takers
What is the first way to determine if the market is perfect when looking at a supply and demand graph
If the demand line of the individual business is horizontal, it is perfect
What does the horizontal demand curve of an individual business also represent
The marginal revenue curve
What is economic cost
Economic cost of production = Opportunity cost = Explicit cost + implicit cost
What is Explicit Cost
The actual expenditure of a business on the purchase or hire of the inputs required for the production process
Give two examples of explicit costs
Wages of labourers
Rent on land and buildings
What are implicit costs
The value of inputs that are owned by the entrepreneur and used in the production process
Give two examples of implicit costs
Rent that could have been earned if the owner used his own building
Interest that could have been earned if the owner has instead invested their money
What is normal profit
The minimum earnings required to prevent the entrepreneur from closing the business and using his factors of production elsewhere
Refer to Graph
Where is the point at which normal profit is achieved
When average cost is equal to price
Total revenue = Total Costs
What is economic profit
The profit made in addition to normal profits
Difference between total revenue and total cost
Refer to Graph
Refer To booklet for Graph on Economic Loss
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Where is profit maximised under perfect competition
Where SMC = MR
What is AVC (Average Variable Cost)
The per unit value
E.g. Labour Cost
Where is the closing down point on a Supply curve graph of a business
Where the equilibrium point is below the Average Variable Cost
What is the short term supply curve also known as
The market supply curve
When is an industry in equilibrium
At the price that clears the market
What are the two things that can change in the long run
New businesses can enter or leave the market
Businesses can adjust their production capacity
Why do businesses ultimately end up making normal profit
The economic profit that businesses make will attract new businesses to the industry. The increase in supply as a result of more businesses entering and the current businesses expanding production will cause price to drop until it reaches P. At P, total revenue = total cost (Minimum on Long run average cost curve). This results in normal profit
What is the result of the perfect market structure on price in the long term on a graph
Price of the product will settle at the lowest point on the LAC curve
What happens once long term equilibrium is achieved
There will be no further entry or exit of businesses
