Lecture 1 - Competitive Firms and Markets Flashcards
Market demand curve is derived from…
Each individual consumer.
Market supply curve is derived from…
Each individual firm that produces goods.
Market structure provides information about…
How firms operating in the market will behave.
Market structure is a function of…
- The number of firms in the market.
- The ease or difficulty with which firms can enter and leave the market. (Entry barriers)
- The ability of firms to differentiate their products from those of their rivals. Whether they sell homogenous (identical) or differentiated products.
What is perfect compeittion?
One type of market structure in which buyers and sellers choose to be price takers.
What is meant by price takers?
A firm is unable to sell its output at a price greater than market price. A consumer is unable to purchase at a price less than the market price. This is what most people mean when they talk about ‘competitive firms’.
What are the characteristics of the market structure; perfect competition?
- There are a large number of firms.
- Firms sell identical products.
- Buyers and sellers have full information about prices charged by all firms. There is no asymmetric information, all information is transparent.
- There are low transaction costs. The expenses of finding a trading partner and completing the trade above and beyond the price, are low. Negligible transaction costs.
- Firms can freely enter and exit the market.
What are some examples of perfect competition?
Agricultural/commodities markets like wheat and soybeans.
Perfect Competition Assumptions: large number of firms.
- No single firm’s actions can raise or lower the price. The more firms in the market the less any one firms output affects the market output and hence the market price.
- Individual firm’s demand curve is a horizontal line at market price.
Perfect Competition Assumptions: identical (homogenous) products.
- If all firms are selling identical products, it is difficult for any firm to raise the price above the market price charged by all firms.
Perfect Competition Assumptions: full information/no asymmetric information/transparent information.
- Consumer knowledge of all firms’ prices makes it easy for consumers to buy elsewhere if any one firm raised its price above market price.
Perfect Competition Assumptions: negligible transaction costs/very low transaction costs.
- Buyers and sellers waste little time or money finding each other.
Perfect Competition Assumptions: free entry and exit.
- Leads to large number of firms and promotes price taking.
Profit maximisation in this class always refers to…
Economic profit.
What is economic profit?
Revenue minus both implicit and explicit cost.
In economics the correct measure of cost is the…
Opportunity cost or economic costs.
What are explicit costs referred to as?
Accounting costs, such as worker’s wages and the price of materials.
What are implicit costs referred to as?
Opportunity costs/economic costs. This is the money you sacrifice from the next best alternative choice.
The full opportunity costs of inputs used might exceed the…
Explicit (or out of pocket costs) costs.
How does economic profit differ from business profit/accounting profit?
Business profit/accounting profit only subtracts off explicit costs from revenues.
What is economic loss?
Business profit minus opportunity costs.
What is the long run for a firm?
‘The time it takes the firm to adjust the input levels that are fixed in the short run’. Typically capital but also labour.
What is the long run for an industry?
‘The time it takes for firms to enter or exit the industry’.
What is an important distinction (key difference) between long run and short run?
In the long run, there are no fixed costs.
What are the three scenarios in which LR market supply is not flat?
- LR market supply when entry is limited.
- Upward sloping if government restricts number of firms, firms need a scarce resource, or if entry is costly. - LR market supply when firms differ.
- Upward sloping if firms with relatively low minimum LRAC are willing to enter market at lower prices than others. - LR market supply when input prices vary with output.
- In an increasing cost market input prices rise with output and LR market supply is upward sloping.
