L5 Competitive Firms And Markets Flashcards
Price taker
Firm cannot significantly affect market price for its output or the prices at which it buys inputs
Faces horizontal demand curve at market price (competitive market)
Perfectly competitive market characteristics
Very many small buyers and sellers
All firms produce identical products
Buyers and sellers have full info about price and product characteristics
Negligible transaction costs
Firm can easily enter and exit the market
Competition
All markets in which no buyer or seller can significantly affect the market price.
Price takers even if the market is not perfectly competitive.
Residual demand curve
Market demand that is not met by other sellers at any given price
At higher prices, the amount supplied by other firms may be greater than the quantity demanded by the market, so residual demand is zero.
Residual demand curve is flatter than the market demand curve
Economic profit
Pi = TR - EC
Economic cost includes explicit and implicit costs (includes opportunity cost)
Accounting profit: TR - TC
Output rules
- Firm sets its output level such that its profit is maximised
- Firm sets its output where its marginal profit is zero
- Firm sets its output where its marginal revenue equals its marginal cost
MR(q) = MC(q)
Marginal revenue
Change in revenue a firm gets from selling one more unit of output
Delta R over Delta Q
Marginal profit
Change in profit a firm gets from selling one more unit of output
MR(q) - MC(q)
Shutdown rules
- Shuts down only if it can reduce its loss by doing so
- Shuts down only if its revenue is less than than its avoidable cost
R(q)=pq < VC(q)
In average terms:
P < AVC(q)
Increasing-cost market
A market in which input prices rise with output
Constant-cost market
A market in which input prices remain constant as output increases
Decreasing cost markets
As market output rises, at least some factor prices fall.
Residual supply curve
Quantity that the market supplies that is not consumed by other demanders at any given price
