MODULE 6: MARKET STRUCTURES Flashcards
CHARACTERISTICS OF PERFECT COMPETITION
- Many buyers and many sellers
- The goods offered for sale are largely the same.
- Firms can freely enter or exit the market.
PRICE TAKERS
take the price as given.
GENERAL RULE FOR PROFIT MAXIMIZATION:
- If marginal revenue is greater than marginal cost, the firm should increase its output.
- If marginal cost is greater than marginal revenue, the firm should decrease its output.
- At the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal.
MC curve is the firm’s ____
supply curve
a cost that has already been committed and cannot be recovered
SUNK COST
If firm exits the market
- revenue falls by TR
- costs fall by TC
(the firm should exit if TR < TC. Divide both sides by Q)
____ is a sunk cost: The firm must pay its fixed costs whether it produces or shuts down. So it should not matter in the decision to shut down.
FC
if P < ATC
Exit
TR > TC (Divide both sides by Q to P > ATC)
In the long run, a new firm will enter the market if it is profitable to do so
As long as price is above average variable cost, each firm’s _____ curve is its supply curve.
marginal-cost
Zero economic profit occurs when
P = ATC
Since firms produce where P = MR = MC, the zero-profit condition is _______.
P = MC = ATC
Profit-maximization
MC = MR
Perfect competition
P = MR
in the competitive eq’m
P = MC
MC is cost of producing the ______
marginal unit
the value to buyers of the marginal unit.
P
a firm that is the sole seller of a product without close substitutes.
monopoly
A ____ firm has market power, the ability to influence the market price of the product it sells.
monopoly
A _____ firm has no market power.
competitive
The main cause of monopolies are other firms cannot enter the market.
barriers to entry
Three sources of barriers to entry
- A single firm owns a key resource.
- The govt gives a single firm the exclusive right to produce the good.
- Natural monopoly: a single firm can produce the entire market Q at lower ATC than could several firms.
a single firm can produce the entire market Q at lower ATC than could several firms.
Natural monopoly
a firm can increase Q without lowering P, so MR=P for the competitive firm
Competitive firm’s demand curve