Lesson 2.1 Flashcards
what does market structure affect and how do we define markets?
affects pricing power of firm so we define markets based on their degree of pricing power
5 factors market structure is determined by?
of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition
4 main types of markets
perfect competition, monopolistic competition, monopoly, oligopoly
of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of Perfect Competition Market
many # of firms present; standardized product, no power over price, low barrier to entry, no nonprice competition, ex. some agricultural sectors
of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of Monopolistic Competition market
many # of firms present, differentiated product, some power over price, low barrier to entry, nonprice competition: advertising and product differentiation, example: retail trade
of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of oligopoly market
few # of firms present; standardized or differentiated product, some power over price, high barriers to entry, nonprice competition: advertising and product differentiation, example: computers, oil, steel
of firms present, type of product being sold, pricing power of firm, barriers to entry, nonprice competition, examples of monopoly market
one firm present, unique product, considerable power over price, very high barriers to entry, nonprice competition: advertising, example; public utilities
how do firms in the absence of market power maximize profit?
they cannot influence demand through advertising or product differentiation so they maximize profit by minimizing cost, through the efficient use of resources and by determining the quantity to produce
how is market price determined in perfect competition
intersection of supply and demand
demand curve of individual firms in perfect competition and why?
horizontal demand curve - if one firm alters output, there will be virtually no effect on market price
what is one factor that causes supply to increase?
advanced in tech
what is one factor that causes supply to decrease?
increased input prices
where is profit maximized?
vertical largest distance between TR and TC, where TR - TC is largest, where MR/P = MC, with MC increasing
what happens when MR > MC
revenue from addition unit is greater than MC so firm should increase production
what happens when MR < MC
revenue from additional unit is less than MC so firm should decrease production
MR curve graph explained with dollars/unit output and output
horizontal (firm demand curve)
will a firm in perfect competition market earn positive profit where P = MC?
not necessarily
MRP definition
amount of an additional unit of variable input adds to firm’s TR
Marginal Expenditure definition
amount of an additional unit of labour adds to firm’s TC
formula for MRP
dTR / dL = MR * MP
formula for ME
dTC / dL = MC * MP
where are profits maximized with MRP and ME
where MRP = ME OR where P = Price of variable / MP variable
when should a firm produce and explain profit at this point
if ATC - AFC (AVC) < P, produce at a level of output where MC = P, even if this results in negative profit. profit will exceed that which would result from shutting down?
what is the shut down point
P = minimum AVC (AVC = MC)
what happens at shut down point?
manager loses money equal to FC if he produces or loses that money if he shuts down, should shut down
define producer surplus
difference between market price and price producer is willing to receive for good/service (producer reservation price)
producer reservation price
MC of producing good/service
what is the supply curve in equilibrium of a perfectly competitive market?
horizontal summation of competitive firm’s MC curves (horizontal summation of firm’s supply curves)
producer surplus with supply (summation of MC curves) and demand curves?
area below where supply = demand and above supply curve
Producer surplus with MC, ATC, AVC curve
area below where output = MC and above MC curve
total revenue with MC, ATC, AVC curve
square where P = Q = MC to the origin
total cost with with MC, ATC, AVC curve
square where P = Q = ATC to the origin
profit of firm with with MC, ATC, AVC curve
TR - TC = square where P = MC = Q to where P = Q = ATC
define variable cost profit
profit of the firm before fixed costs
in perfect competition, what do the firm’s supply curves represent?
MC curve
consumer surplus with market supply and demand curves
triangle where P = Supply = Demand to above where market demand curve
total surplus with market supply and demand curve
total area below market demand curve and above market supply curve = consumer surplus + producer surplus
what is long run average total cost curve also called?
long run average cost curve
in the long run what are costs?
variable
what happens if Price > long run average cost
firms would earn positive economic profits and new firms would enter industry. the increase in supply would drive price and profits down
what happens if price < long run average cost
firms would leave industry since profits would be negative and the supply would fall so market price and profits would rise
in long run equilibrium, what will economic profits be?
0
what is equilibrium in long run?
where profit = 0, and individual price = lowest point on long run average cost curve (individual Q); market price = long run MC and short run MC
what happens in a constant cost industry?
input prices and technology do not change as firms enter or exit the industry.
long run supply curve of constant cost industry
horizontal
what happens in an increasing cost industry?
increase in output leads to an increase in input prices
long run supply curve of increasing cost industry
upward-sloping
long run supply curve of decreasing cost industry
downward-sloping
allocation of resources in short run equilibrium if demand for corn increases and demand for rice decreases
price of corn will increase, quantity of corn produced will increase and corn producers will earn positive economic profits. price of rice will decrease, quantity of rice produced will decrease and rice producers will earn negative economic profits
allocation of resources in long run equilibrium if demand for corn increases and demand for rice decreases
firms will reallocate resources away from production of rice and towards production of corn. price of corn will decrease from its high, quantity of corn produced will increase further, and corn producers will find that their economic profits decline to 0. price of rice will increase from its low, quantity of rice produced will increase from its low and rice producers will find that their economic profits rise to 0
in short run and long run, where do producers produce?
short run where P = MC, long run where LRAC is at minimum
formula for LRAC
LRTC / Q
total surplus in a market is a measure of…
social welfare created by the market
define barriers to entry
barriers that determine how easily firms can enter an industry, depending on market structure
producer surplus formula
TR - TVC (variable cost profit)
If a representative firm with total cost given by TC = 20 + 20q + 5q2 operates in a competitive industry where the short-run market demand and supply curves are given by QD = 1,400 – 40P and QS = –400 + 20P, the number of firms operating in the short run will
be:
find equilibrium Price, firms operate where P = MC and find Q each firm produces, then find equilibrium quantity to find total firms -> 200
If price is above the average variable cost but below the average total cost of a representative firm in a competitive industry:
there will be exit from the industry over time
Meteor Tie Company produces ties from fabric according to Q = 10 + 4F – (1/3)F3. If fabric is free and ties sell for $20, what is Meteor’s optimal usage of fabric?
optimal use: profit maximization where d/dF of profit = 0 -> 2
profit maximization using Price, Price of input and MP input
maximize profit where P * MP input = Price input
what is long run firm output?
where LRAC is minimum
what is long run market output?
market price substituted in demand equation
what is long run market price?
set Price = SR firm MC = LR firm MC with LR firm output substituted
what happens in decreasing cost industry?
input prices fall or technology improves as firms enter the industry.
if demand of a product increases in a constant-cost industry:
short-run price goes up, but long-run price remains constant.
The long-run supply curve for a product is horizontal with ATC = 200. Market demand is defined as P = 1,000 – 5Q. The market is competitive and is in long-run equilibrium with 40 firms in the industry. If a $50 tax is imposed on sellers, how many firms will be in the industry at the new long-run equilibrium?
37
