Introduction to the Theory of Market Structure Flashcards
The four firm concentration ratio (The percentage of the value of sales accounted for by the four largest firms in the industry.)
more than 40
less than 40
oligopoly
Monopolistic competition
What is The Herfindahl-Hirschman Index (HHI)
-The square of the percentage market share of each firm summed over the largest 50 firms in a market.
A market with an HHI less than 1,000 is regarded as competitive.
An HHI between 1,000 and 1,800 is moderately competitive.
characteristics of a perfectly competitive market
The number of firms is large.
The firms’ products are identical / standardized.
There is free entry and exit, that is, there are no barriers to entry.
There is complete information.
Both buyers and sellers are price takers.
Do not have the ability to collude
*Firms are profit maximizers.
How does perfect competition arise?
The firm’s minimum efficient scale is small relative to market demand, so there is room for many firms in the market.
Each firm is perceived to produce a good or service that has no unique characteristics, so consumers don’t care which firm’s good they buy.
Total revenue vs marginal revenue
p x q vs change in total revenue that results from a one-unit increase in the quantity sold.
Comparing the demand curve for and industry vs an individual firm
The demand curve facing the firm is different from the industry demand curve.
A perfectly competitive firm’s demand is horizontal (perfectly elastic), even though the demand curve for the industry is downward sloping.
Each firm in a competitive industry is so small that it does not need to lower its price in order to sell additional output.
The profit-maximizing level of output is=
Marginal Revenue is equal to marginal cost
(If marginal revenue does not equal marginal cost, a firm can increase profit by changing output.
The supplier will cut back on production if marginal cost is greater than marginal revenue.
The marginal cost curve is the=
above the point where price exceeds average variable cost, is the firm’s supply curve
To determine profit or loss:
Find the point where mr=mc and subtract total cost
Market signal when
Psotivie Economic profit
stattic economic profit
economic loss
Enter the market
Long-run equilibrium
Exit the market
What is the shut down point?
the point at which the firm will be better off by shutting down than it will if it stays in business.
As long as total revenue is more than total variable cost, temporarily producing at a loss is the firm’s best strategy since it is taking less of a loss than it would by shutting down (loss minimization).
