Microecon chapter 9 Flashcards
Competitive market (perfect competition) arises when… (4)
- Many sellers of an identical product
- Customers know the makers of the produce sold
- No restriction of entry/ exit
- Each firm output is small relative to industry output
Firms are…
Price takers
Makers demand curve
Negative slope
Firm demand curve
Horizontal line
Average revenue fromula
AR = TR/Q = PQ/Q = P
Firm precision in SR
- Produce or not
- If produce, how much?
Firm precision in LR
- Increase/decrease in plant size
- Stay in or exit industry
MR in competitive market
Additioned revenue from 1 market sale
MC in competitive market
Additioned cost to make 1 market unit
If MR > MC
Q↑ and π↑
If MR < MC
Q↓ and π↑
If MR = MC
NO Δ in Q to improve π (π is maximized)
If P < ATC
π > 0
If P > ATC
π < 0
If P = ATC
π = 0
MC in SR supply curve (3)
- Above minimum AVC
- No supply bellow minimum AVC
- P < AVC => no supply
If P < P0
Shut down
If P0 ≤ P < P1
Decision time
If P0 > P1
Economic profit
In LR, industry can adjust one or two wages
- # of f firms may change
- Firms may change the scale of the plant
Signal to firms to entry/exit
Economic profit / loss
If π > 0
Entry n and s ↑ (Shift right)
If π < 0
Exit n and s ↓ (Shift left)
If π = 0
No entry/exit (LR solution)
Price in LR
At minimum ATC
Conditions for LR (3)
- Firm max π and P = MR = MC
- No economic profit/loss (P = min. ATC)
- Firms cannot Δ plant size to increase profit (AT min. LRAC or MES)
Change in technology (2)
- Increase in tech lowers price until P = ATC
- Entry for new firms
Declining industries (2)
- Decrease in demand => successive decrease in price
- P < ATC => economic loss
Firm response to declining industries (2)
- Continue to operate as long as P = AVC
- Use existing equipment until it wears out
Government response to declining industries (3)
- Support industry to not lose jobs
- Do nothing, allow failure
- Retraining, temporary income support
