slide 8 Flashcards
There are 4 market structures
- perfect competition
- monopoly
- monopolistic competition
- oligopoly
define the differences
perfect competition
- large # of firms
- identical goods (perfect substitutes)
- very easy to enter and exit
- zero control over the price of a good
Monopolistic competition
- lots of firms
- goods are varied (ie. types of cereals, are some variations)
- relatively easy to enter and exit
- some control over price
oligopoly
- few large firms
- will collude and act as a monopoly, hard to detect collusion
monopoly
- 1 firm
- extreme entry barrier
- complete control over price
in a perfect competition market why does a firm have zero control
because there is a large # of firms in a perfect competition, you are too small in the grand scheme of things to make a difference. the price is set by the market
true or false: marginal revenue = price, always in a perfect competition
true
true or false, in perfect competition the market is perfectly elastic
true, it is a horizontal line in a graph of price and quanity
when is profit maximized in the short run in a perfect competition market
economic profit is maximized when MR = MC, this is because MR is constant.
If MC is below MR, I will be able to make more money if I produce more, when MC = MR, i cannot produce more without losing money
What happens to economic profit when MR > MC
MR < MC
MR = MC
MR > MC: economic profit increases if output increases
MR < MC: economic profit decreases if output decreases
MR = MC, economic profit maximized. increase or decrease in output will result in economic loss
what is the shutdown point
the price and quantity at which the firm will make the decision to shut down or not.
The point is at minimum AVC, where the MC crosses the AVC curve
At the shutown point, firms incurs a loss equal to TFC
true or false: maximum profit is not always a positive economic profit
true, to see if a firm is making profit or loss, we compare the firm’s ATC at the profit maximizing output with the market price
what is the economic profit expected to be if
Price = ATC
P > ATC
P < ATC
Price = ATC:
No economic profit
P > ATC
Positive economic profit
P < ATC:
Negative economic profit
what is the economic profit expected to be in the short and long run
short run:
positive, even or negative
long run:
even
when will firms enter in a short run
what is the expected behaviour in the long run
firms will enter if there is a profit to be made.
in the long run the market price will fall until firms are making zero economic profits
true or false: you can have positive accounting profit and zero economic profit
true
what is the maximum loss a firm will experience in the short run
its total fixed cost, the max amount any firm can afford to lose is it’s fixed cost plus producer surplus is maximized when resources are used efficiently.
