Economics for Managers Chapter 7 Flashcards
Perfect Competition
A market structure characterized by a large number of firms in the market, and undifferentiated product, ease of entry into the market, and complete information available to all market participants.
Price-taker
A characteristic of a perfectly competitive market in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.
Profit Maximization
The assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible. This can be accomplished by focusing on revenues or costs or both factors.
Profit-maximizing Rule
The maximize profits, a firm should produce the level of output where marginal revenue equals marginal costs.
Marginal Revenue for the Perfectly Competitive Firm
The marginal revenue curve for the perfectly competitive firm is horizontal because the firm can sell all units of output at the market price, given the assumption of a perfectly elastic demand curve. Price equals marginal revenue for the perfectly competitive firm.
Shutdown Point for the Perfectly Competitive Firm
The price, which equals a firm’s minimum average variable cost, below which it is more profitable for the perfectly competitive firm to shut down than to continue to produce.
Supply Curve for the Perfectly Competitive Firm
The portion of a firm’s marginal cost curve that lies above the minimum average variable cost.
Supply Curve for the Perfectly Competitive Industry
The curve that shows the output produced by all perfectly competitive firms in the industry at different prices.
Equilibrium Point for the Perfectly Competitive Firm
The point where price equals average total cost because the firm earns zero economic profit at this point. Economic profit incorporates all implicit costs of production, including a normal rate of return on the firm’s investment.
Economies of Scale
Achieving lower unit costs of production by adopting a larger scale of production, represented by the downward sloping portion of a long-run average cost curve.
Diseconomies of Scale
Incurring higher unit costs of production by adopting a larger scale of production, represented by the upward sloping portion of a long-run average cost curve.
Industry Concentration
A measure of how many firms produce the total output of an industry. The more concentrated the industry, the fewer the firms operating in that industry.
Price-cost Margin (PCM)
The relationship between price and costs for an industry, calculated by subtracting the total payroll and the cost of materials from the value of shipments and then dividing the results by the value of the shipments. The approach ignores taxes, corporate overhead, advertising and marketing, research, and interest expenses.
