Econ Chapter 8 Flashcards
Four Major Market Structures
1) Perfect Competition
2) Monopoly
3) Monopolistic Competition
4) Oligopoly
Perfect Competition
- Firms sell a homogeneous or standardized product
- Products are all the same
- New firms can easily enter
- ex, wheat market
Monopoly
- Only one firm that produces a good or service
- No substitutes
- Significant barriers to potential entrants into the market
Monopolistic Competition
- Falls between perfect competition and monopoly
- Monopolistic competition is a market structure where firms both have an element of competition and monopoly
- Each firm sells slightly different products so they have some monopoly
- Many firms so they have to compete
Oligopoly
- Falls between perfect competition and monopoly
- Exists when firms produce similar or identical goods
- Allows for some competition
- Significant share in market
- Firms behave closely to their competitors
Price Taker
A perfectly competitive firm takes the price that it is given by the intersection of the market demand and market supply curves
3 Factors of a Perfectly Competitive Market
1) Many buyers and sellers
2) Identical Products
3) Entry and Exit Easily
Total Revenue
The product price times the quantity sold
Average Revenue
The total revenue divided by the number of units sold
Marginal Revenue
The increase in total revenue that results from the sale of one more unit
Profit Maximizing output Rule
Always produce at MC=MR
Three step method to finding if a firm is gaining or losing
1) Find the profit maximizing output level q*
2) Find the profit maximizing output level price P, and find total revenue
3) Find the Total Costs. go straight up rom q to the ATC curve, and then left to find average total cost per unit, multiply ATC by output levels to find total costs
When should a firm run at a loss?
- When price is above Average variable cost
- The firm can still make money to cover some of the fixed costs
When Should a firm Shut down?
- When price is below average variable cost
- The is losing more money then their fixed cost so it is smart to shut down
Short Run Supply Curve
Shows the marginal cost of producing any given output, above the AVC curve
Short Run Market Supply Curve
A horizontal summation of the individual firms supply curves
If a business is profitable what happens in the long run?
Supply curve shifts to the right as more firms enter the industry and as existing firms expand
Do firms profit in the long run?
No
What are normal economic returns in the long run?
Zero economic profit
What happens when firms leave / enter the market?
When they leave the price raises and firms losses are minimized
When they enter the price drops and firms get a loss
When is there no economic tendency for firms to enter / exit the industry?
When there is zero economic profit
Cost-Constant Industry
- Input prices do not change as industry output changes
- They don’t buy enough to change the price of inputs
Increasing Cost Industry
- Input prices rise and cost curves rise as industry output rises
Decreasing Cost Industry
Expansion in the output of an industry can lead to a reduction in input costs and shift the MC and ATC curves downward
Productive Efficiency
Where a good or service is produced at the lowers possible cost
Allocative Efficiency
Were p = MC and production is allocated to reflect consumer preferences
