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Econ > Topic 13- Firms in Competitive Markets > Flashcards

Topic 13- Firms in Competitive Markets Flashcards

1
Q

Competitive Market

A

market with many buers and many sellers, so each individual has a negigible impact on market price

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2
Q

Who are price takers?

A

People who don’t influence the price of goods in a market

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3
Q

assumptions we make about competitive markets

A

many buyers and sellers
identitcal products and being sold
firms can freely enter/exit
sellers and buyers well informed about prices

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4
Q

in competitive market, is the demand for each firms output perfectly elastic or inelastic

A

ELASTIC, if they sell above the price, no one will buy, below, there is infinite demand, and exactly at price people will buy any quantity

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5
Q

When does perfect competition arise?

A

When the firms MINIMUM EFFICIENT SCALE is small relative to the market demand, so there is room for a lot of other firms!!!!

in monopolies min eff scale covers market demand

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6
Q

MINIMUM EFFICIENT SCALE

A

smallest quantity of output a firm can produce where the long run average cost reaches its lowest level!!!!!!!!

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7
Q

Profit formula

A

Profit= TR- TC

TR= Price x Quantity!

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8
Q

What is marginal revenue, what is the curve the same as?

A

the cahnge in total revenue that results from a one unit increase in the quantity sold!!!!

MR= CHANGE IN TOTAL REV/CHANGE IN QUANTITY

CURVE IS THE SAME AS DEMAND CURVE, because the EXTRA revenue from one extra unit produced is the market price of that good; which is wanted by consumers at this price!!

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9
Q

What are economic profits?

A

The difference between total revenues and the cost of production!!!! considering both implicit (opp costs) and explicit costs

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10
Q

How are profits maximized?

A

Marginal revenue is constant, and marginal cost increases as output increases!!!

so….

profit is maximized when marginal revenue= marginal cost!!!

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11
Q

what does marginal revenue curve visually look like

A

PERFECTLY ELASTIC!

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12
Q

What is MR>MC, MR<MC, MR=MC

A

When MR>MC, the firm is under producing!!!, producing a greater quantity increases its profit

When MR< MC, the firm is over producing, producing less increases its profit

When MR= MC, the firm is profit maximizing, no change in production will increase profit

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13
Q

What is the size of profit on a graph?

A

(P-ATC)x Q

WHERE height is Price- Average Total Cost
WHERE width is Quantity sold

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14
Q

hat is the difference between the Price/marginal revenue line and average total cost line show?

A

The profit for that one single unit of output

MULTIPLYING THIS BY THE WHOLE QUANTITY OF TH RECNTANGLE GIVES THE TOTAL PROFIT

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15
Q

Is maximum profit of a firm always positive?

A

nO!

Sometimes a loss is unavoidable, if the firms have high fixed costs!!! losses must be incurred

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16
Q

Is profit maximixed where MC and ATC curves intersect?

A

NO! because this is only maximizing profit per unit, NOT TOTAL PROFIT!!!!

The next few units of the good that are produced bring in more marginal revenue than their marginal cost

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17
Q

Up to where should firms increase their level of output

A

TO THE POINT WHERE MR=MC

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18
Q

How to see if a firm is making a profit/incurring a loss?

A

compate the firms Average TOTAL cost at the prift maximizing output (MR=MC) with the market price

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19
Q

If the point of the ATC curve which is in line with MR=MC is on the MR line?

A

The most profit the firm can make is 0- they can only break even to cover all of their costs!!!!

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20
Q

If the point of the ATC curve which is in line with MR=MC is ABOVE the MR line?

A

The firm will always be at a loss!! because price of the good will always be lower than the cost ot produce it

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21
Q

SMALLEST LOSS POSSIBLE RULE?

A

Whereever Marignal revenue= Marginal cost

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22
Q

How to use Price and ATC curves to determine if the firm is making a profit, breaking even, or making a loss?

A

WHERE MR=MC

P> ATC, then FIRM CAN MAKE A PROFIT
P<ATC then the firm is at a loss
P= ATC then the firm breaks even

23
Q

What are the firms choices if it is making a loss?

A

EITHER EXIT THE MARKET OR TO STAY!

if staying: either produce goods, or shut down temporarily

24
Q

What decisions do the firms make?

A

The ones that maximizes profit and minimizes loss

25
Q

Loss formula
- What happens if firms shut down?

A

Total Fixed costs +(average variable cost -price) xQuantity

TFC + (AVC - P) x Q

Quantity is equal to 0; fixed costs should be ignored (sunk costs)
If P <AVC, THE FIRM SHOULD PRODUCE 0 UNITS OF OUTPUT
If P >=AVC, then the MR=MC rule guides production- produce at this quantity!!!! [ALSO WITH THIS FORMULA LOSS=NEGATIVE, MEANING PROFIT!!!]

26
Q

What is a firms shut down point

A

When the firm is indifferent between producing the profit maximizing quantity and shutting down

THIS IS AT MIN OF AVC

27
Q

What does a perfectly competitive firms supply curve show?

A

Firms profit maximizing output VARIES as the market price varies (other things held constant)

28
Q

WHAT POINT DOES THE FIRM PRODUCE OUTPUT!!

A

Where marginal cost=Marginal revenue

and because marginal revenue= price the firms supply curve is LINKED to the marginal cost curve

29
Q

What is the first point of the supply curve

A

The shutdown point!! where the firm is indifferent between producing nothing and producing at the shut down point

THIS IS WHERE PRICE= MINIMUM AVC

30
Q

How are all the points of the supply curve created? (short run)

A

You know that MC curve and Supply curve are linkned!!! so basically every point of the mc curve is the supply curve!!!!!!!!!! bc every point is a point where MR=MC

31
Q

What are the two choices available at the shut down price

A

1) produce the shutdown quantity
2) produce 0!

32
Q

what does hsort run market equilbrium look like

A

LIKE COMMUHNIST LOGOO

33
Q

In the long run equilibrium, wha thappens to firms?

A

Firms break even because they can enter or exit the market

-In a market firms are making a profit
-seeing this more firms enter the market, supply curve shift to the right
-price decreases and quantity increases,
-market price falls again and firms earn only zero profit
-firms leave market!!!

34
Q

What is the exit price

A

THE MINIMUM POINT ON THE AVERAGE TOTAL COST CURVE!!!

35
Q

What is the shutdown price, why?

A

THE MINIMUM POINT ON THE AVERAGE VARIABLE COST CURVE

In the long run, all inputs are variable, and all costs are variable

36
Q

Long run: the market will supply what demand at what point?

A

They will supply any demand by consumers at a price equal to the minimum point on the typical firms average cost curve

the long run supply curve is perfectly horizontal at this price!!

37
Q

what is the long run price completely determined by?

A

the forces of supply

38
Q

Long run supply curve:

A

a curve that shows the relationship in the long run ebtween market price and the quantity supplies

perfectly horizontal

39
Q

in the long run, an increase or decrease in demand does what to supple
y

A

THE EXCAT SAME THING!!!!!!! PRICES ALWAYS RETURN TO BREAK EVEN LEVEL

40
Q

In the long run, when the firm can recover both fixed and variable
costs it will choose to exit if the price is less than average total cost

A

In the long run, when the firm can recover both fixed and variable
costs it will choose to exit if the price is less than average total cost

41
Q

In a competitive market what does the price line equal on the supply and demand chart?

A

Both Marginal revenue, and average revenue

42
Q

shutdown vs exit

A

shutdown: temporary, still pay fixed costs (MC<AVC)

exit: pay nothing you leave the amrket

43
Q

when does a firm shut down?

A

the firm shuts down if the revenue that it would earn from producing is less than its variable costs of production.

If the price doesn’t cover the average variable cost, the firm is better off stopping production altogether. The firm still loses money (because it has to pay its fixed costs), but it would lose even more money by staying open

44
Q

what costs are sunk in the short run

A

FIXED COSTS, you must pay em

45
Q

Why Do Competitive Firms Stay in Business If They Make Zero Profit?

A

MINDBLOWING SHIIIID:

total cost includes the time and money that the firm owners devote to the business. In the zero-profit equilibrium, the firm’s revenue must compensate the owners for these opportunity costs.

As a result, in the zero-profit equilibrium, economic profit is zero, but accounting profit is positive

46
Q

To maximize profit, a firm chooses a quantity of output such that marginal revenue equals marginal cost. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals marginal cost. Thus, the firm’s marginal-cost curve is its supply curve.

A

To maximize profit, a firm chooses a quantity of output such that marginal revenue equals marginal cost. Because marginal revenue for a competitive firm equals the market price, the firm chooses quantity so that price equals marginal cost. Thus, the firm’s marginal-cost curve is its supply curve.

47
Q

A competitive firm’s short-run supply curve is its–cost curve above its–cost curve.

A

MARGINAL

AVG VARIABLE

48
Q

What point do firms produce at

A

The minimum efficient scale

49
Q

What is P<ATC, P>ATC, and P=ATC used for

What is P<AVC, P>AVC, and P=AVC used for (also what is the scene when P= min AVC)

A

PROFIT STATUS; loss, profit, breakeven

SHOULD THE FIRM SHUTDOWN: produce 0 units, or for P>=AVC KEEP PRODUCING TILL mr=mc

p=min avc, this is the shutdown point

50
Q

where is exit price

A

The exit price coincides with the minimum point on the average
total cost (ATC) curve

51
Q

Minimum of Average total cost curve, if it is touching the MR line?

A

This is the minimum efficient scale; this means that the mirm is going to make no profit!! because MR=MC, and MC curve is crossing ATC at this point

52
Q

Minimum of Average variable cost meaning

A

this is the shut down price, firms will be indifferent to producing more or producing 0

53
Q

total revenue vs profit

A

TR=PxQ
Profit= (P-ATC)xQ

54
Q

When is an industry in a long run equilibrium

A

When firms earn 0 profit= when the ATC curve’s minimum point is on the MR line

Econ (20 decks)

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