Unit Six Flashcards
Characteristics of perfect competition
There are no barriers to entry
There are many firms
Products in a market are homogenous
Firms are price-takers: prices are determined by the buyers and sellers in the market
There are no barriers to entry
Barriers to entry are restrictions/requirements that keep firms from entering and exiting the market
There are many firms
The more firms, the more competition
Products in a market are homogenous
Identical/perfect substitutes
Firms are price-takers
Prices are determined by the buyers and sellers in the market
Supply and demand
EQ price is accepted by all firms
Perfectly competitive firm
One company that is a part of a market for a good
A perfectly competitive market is made up of more than a few perfectly competitive firms that produce the same good
The perfectly competitive firm’s supply curve
The lowest the firm is willing to supply goods is at the cost of producing the good
The marginal cost curve sets the firm’s willingness to supply or the absolute least the firm can charge for the next item produced
Market supply and demand graph
Supply and demand cross at equilibrium price and quantity
Firm supply and demand graph
MC is supply, down then curves up
Equilibrium price is demand, perfectly elastic, same as MR
Perfectly competitive firm’s demand curve
The perfectly competitive firm’s demand curve derives from the equilibrium price in the market
It is perfectly elastic because the firm sells all goods at that one price
The firm has no power to change its price
The revenue from each good sold is equal to the market price
Marginal revenue
The change in total revenue from selling another unit
MR = change in TR / change in output
MR. DARP
AR = TR/Q = Price
If there is only one possible price then AR must equal MR
AR = average revenue
MR = marginal revenue
P = price = demand = average revenue = marginal revenue
Profit
Total revenue - total cost
Average profit
Price - average total cost
Marginal profit (profit at each level of output)
MR - MC
Average profit
Profit / Q
Average profit
(Total revenue - total cost) / Q
Profit maximization rule
Profit is maximized where MR = MC
If MR > MC then you should produce more
If MC > MR then you should produce less
Average total cost (ATC)
Shows the average cost of producing one unit at a particular level of output
Profit can be determined by comparing ATC to price at a particular level of output
PC firms in the short run
PC firms can make profits or losses in the short run
Drawing profit and loss: quantity line test
Locate q firm in producing at
Draw vertical line up to p. Draw horizontal line to y axis
Draw vertical line up to ATC. Draw horizontal line to y axis
Shade box
Area of box = Q x (P - ATC)
Market power
The ability to influence the price of a product
PC firms don’t have because they’re price takers, due to significant number of firms in the market
PC firms in the long run
If P > ATC, firms enter, shifts supply right
If P < ATC, firms exit, shift supply to left
Firms can’t enter/exit in the short run due to the presence of fixed costs
Profits
There are no economic profits or losses in PC firms in the long run due to a lack of barriers to entry
Firms are said to be earning a normal profit or a profit that just covers their implicit costs
PC firms in the short run
PC firms can’t enter/exit in the short run due to fixed costs
If they are losing money they can either shut down or stay open
If P > AVC stay open
If P < AVC shut down
Sunk cost
A cost that has already been committed and can not be recovered
Fixed costs are sunk in the short run
The short run market supply curve
Derives from the portion of the MC curve that is greater than AVC
The market is unwilling to supply below AVC
The long run PC market supply curve derives from the portion of MC that is above ATC
How do taxes and subsidies affect supply and demand
Taxes lower them, subsidies raise them
Per unit vs lump sum taxes
Per unit affects marginal cost, lump sum affects ATC
Lump sum subsidy
ATC decreases, MC no change, output no change
Lump sum tax
ATC increase, MC no change, output no change
Per unit subsidy
ATC decrease, MC decrease, output increase
Per unit tax
ATC increase, MC increase, output decrease
Industry
Another word for market
Allocative efficiency
Marginal cost = price
Productive efficiency
Lowest ATC
Break even price
Minimum average total cost
Shut down price
Minimum average variable cost
