Unit 6 Flashcards
Competitive market
- has many buyers and sellers
- sells products that are relatively the same
- no barriers to entry: no restrictions that keeps firms from entering and exiting the market
- firms are price takers: prices are determined by the buyers and sellers in the market
Profit=
TR=
TR is proportional to:
Profit:Total revenue-total cost
TR=PxQ
TR is proportional to the amount of output
Average revenue
What does AR tell you?
AR=TR/output
Tells you how much revenue a firm receives for the typical unit sold. AR= price of the good
What happens if firms do no take the price (at equilibrium)?
There will be a shortage of surplus
The firm maximizes profit by producing at the quantity where…
Should you produce more more less when
MR>MC
MR
MC=MR
Produce more when MR>MC
Produce less when MR
PC firms supply curve
The lowest the firm is willing to supply goods is at the cost of producing the good, upward sloping
ATC is U-shaped
MC cost curve crosses ATC at the minimum of ATC
PC firms demand curve
P=?=?
Perfectly elastic-a horizontal line at the market price, because the firm is a price taker: the price of the firms output is the same regardless of the quantity produced
P=AR=MR
Shutdown vs. Exit
Shutdown: short run decision to not produce anything for a specific period of time due to current market conditions
Exit: long run decision to leave the market
Why do short run and long run decisions differ in terms of fixed costs?
In the short run, fixed costs can not be avoided, but they can in the long run
If a firm shuts down in the short run, they still have to pay fixed costs, but if they exit, they avoid both fixed and variable costs
Why don’t PC firms just increase their price to make profit?
Firms are price takers (don’t have market power) accept price set by the market
If a PC firm increased its prices QD Would drop to ZERO
If the PC firm is making money, what happens in the market?
Supply increases because there are more firms in the market
Market power
Why don’t PC firms have this?
the ability to influence the price of a product
They are price takers and there are many firms in the market
In the long run, when do firms enter/exit the market? How does this affect the supply?
If P>ATC, firms will enter the market, supply will shift RIGHT
If P
Why can’t firms enter/exit the market in the short run?
Fixed costs
Are there economic profits or losses in the long run for PC firms? Why/why not?
No, because of a lack of barriers to enter
A firm earn a normal profit when…
Their profit covers their implicit costs
A firm shuts down in the short run when the price of a good is less than
The AVC of production
Where is a firms short run supply curve?
What happens if the price falls below AVC?
The portion of its MC curve that lies above AVC
If price falls below AVC, the firm is better off shutting down
Sunk cost
A cost that has already been committed and can not be recovered
A firm exits the market in the long run when…
The revenue it would get from producing is less than its total costs
Where is the firms long run supply curve?
What happens if price falls below ATC?
The portion of its MC curve that lies above ATC
The firm is better off exiting the market
How is market supply related to the number of firms in the short run?
For any given price, each firm supplies a quantity of output so it’s marginal cost=price, as long as price is above AVC, each firms MC curve is its supply curve.
How will firms decide whether or not to enter the market in the long run?
Decisions on entry and exits depend of incentives the owners of existing firms have. If firms in the market are already making a profit, new firms will have the incentive to enter the market. The entry of new firms will increase the number if firms, which will increase the QS and decrease prices and profits.
At the end of entry and exit, how much economic profit should a firm remaining in the market be making?
Economic profit=
When are firms encouraged to enter/exit the market?
ZERO
Economic profit: price of good=ATC
If price is above ATC, profit is positive, firms will enter
If price is below ATC, profit is negative, firms will exit
How does a lump sum affect each curve?
- affects fixed cost
- affects ATC
- doesn’t affect MC
How does per unit affect each curve?
- affects VC
- affects MC
- changes MC=MR
How does a lump sum SUBSIDY affect ATC, MC and output?
ATC: decrease
MC: no change
Output: no change
How does lump sum TAX affect ATC,MC, and output?
ATC: increase
MC: no change
Output: no change
How does per unit SUBSIDY affect ATC, MC, and output?
ATC: decrease
MC: decrease
Output: increase
How does per unit TAX affect ATC, MC, and output?
ATC: increase
MC: increase
Output: decrease
Why do competitive firms stay in business if they make zero profit?
Profit=TR-total cost, and total cost=all opportunity costs of the firm (which deals with time/money devoted to the business) in the zero profit equilibrium, the firms revenue must compensate the owners for the time and money they use to keep the business going. Even if the profit is zero, the revenue from the business compensates the opportunity costs.
When a PC firm in the long run equilibrium is earning normal profit but not an economic profit, what is equal?
TR from production are equal to the sum of implicit and explicit costs
Is the demand curve for a PC firm elastic, inelastic, perfectly elastic or perfectly inelastic?
Perfectly elastic
What will an increase in a PC firms demand lead to?
Upward shift in long run ATC curve
At what price will a PC firm shut down in order to maximize its profit?
When price falls below AVC
