Perfectly Competitive Markets Flashcards
Competitive Market (perfectly competitive)
1) market has many buyers + sellers
2) goods offered by sellers mostly same
3) Firms can freely enter/exit market
actions of individual buyers/sellers negligible impact –> everyone is a price taker
Price of Good Equals
1) Average revenue for ALL firms
2) marginal revenue for competitive firms
Average Revenue
total revenue/quantity
3 rules for profit maximizatoin
1) When marginal revenue exceeds marginal cost –> firm increase output
2) when marginal cost exceeds marginal revenue –> firm should decrease output
3) at profit-maximizing output –> marginal revenue equals marginal cost
What is the marginal cost curve also represent for firms?
supply curve –> since MC curve represents quantity of good firm gives at any price
shutdown vs exit
1) shutdown = short run decision to not produce anything because of current market conditions
2) exit = long run decision to exit market
sunk cost
1) expense that has occurred and cannot be recovered
2) example = shutting down farming for a season –> land goes fallow –> sunk cost VS if they exit they sell the land so not sunk cost
When does a firm shutdown
1) revenue it would earn is less than variable costs of production
2) Shut down if P < AVC
(price of good is less than average variable cost)
Why should you ignore sunk costs
1) nothing can be done about it –> rationale to ignore them
why might restaurant stay open even if nobody is there?
1) ignore fixed costs –> those remain same regardless
2) stay open if customers coming covers the variable costs –> close for afternoon if the customers coming in do not cover variable costs
when does a firm exit the market
1) TR < TC (when total revenue less than total cost of production)
2) P < ATC (when price of good is less than average fixed costs)
When does a firm enter market
1) Enter if price > Average total cost
Measuring Profit
1) (P-ATC) * Q
Efficient Scale
1) production with lowest average total cost (when this happens average total cost = price)
2) essentially process of entry/exit –> profit goes to 0 for long run
3) MC = ATC
How does 0 profit work?
1) based on fact that economic profit is 0 BUT accounting profit is positive
Why might long-run supply curve slope upward?
1) resources used in production available in small quantities
2) firms have different costs
Elasticity of long run vs short run supply curve
1) long run is more elastic since firms can enter/exit more easily in long run
MR DARP
MR = D = AR = P
