Week 5 Flashcards
What is the objective of firms?
To maximise profit
What is the formula for profit?
TR - TC
To maximise profit, firms should produce quantity of output where the difference between TR and TC is …
the greatest
What is the formula for Average Revenue?
TR / Q
Average Revenue is equal to what?
Market Price
What is the formula for Marginal Revenue?
change in TR / change in Q
What is Marginal Revenue?
the change in total revenue from selling 1+ unit
What is Marginal Cost?
the increase in TC resulting from producing another unit
A demand curve for a perfectly competitive market is …
Horizontal
The MR curve for a perfectly competitive market/firm is the same as the ….
Demand Curve
How do firms use MR and MC to maximise profit?
Firms need to compare MR from selling an extra unit to MC of producing an extra unit. The difference btw MR and MC is the additional profit (loss) from 1 more unit.
If MR > MC, what is the impact on profits?
Profits rise (meaning firm will expand operation)
Firms what to continue producing units of output until the point where … because …
MC = MR
Cos at this quantity the firm will make no extra profit
The profit maximising output/quantity is where …. (using TC and TR)
the difference between TC and TR is greatest
The profit maximising output/quantity is where …. (using MC and MR)
MC = MR
In a perfectly competitive market, P =
=MR
=MC
What is formula for profit (using P, Q, TC)?
= (P*Q)-TC
What is formula for profit (using P, Q, ATC)?
= (P-ATC)*Q
To maximise profit a firm produces level of output where….
MC=MR
What happens to profit when P > ATC?
Profit earnt
What happens to profit when P = ATC?
Breakeven
What happens to profit when P < ATC?
Loss
In long run what will happen to firms if they can’t cover their costs?
They will close
In a perfectly competitive market, firms continually enter/exit market
What is economic profit?
Revenue minus all costs - implicit and explicit
What is the formula for economic profit?
= TR - TC
What happens to the supply curve when new firms enter the market?
Supply curve shifts to the right
- the more firms in a market there further to the RIGHT the supply curve is.
What is the impact on the market price when more firms enter the market?
Market price decreases (cos supply curve shift right)
What is accounting profit?
Revenue minus all explicit costs
Is economic profit a better view of the health of a business (than accounting profit)? Why?
Yes
- cost it considers all costs, implicit and explicit
What is economic loss?
Where supplier’s TR < TC
Will firm continue to produce if price < AVC?
Yes, in the SHORT RUN even when suffering loss.
But in LONG RUN frims will exit industry if not able to cover all costs.
What happens when firms exit the market?
- supply curve shifts left
- price rises
Do economic profits attract firms to a market?
Yes
What happens to price when firms enter the market?
Price is pushed down (until a typical firm breaks even)
What happens to price when firms exit the market?
Price is pushed up (until a typical firm breaks even)
What does the entry / exit process result in?
Long-run competitive equilibrium
What is the Long-run competitive equilibrium?
a situation where the entry/exit of firms results in typical firm breaks even
What is the Long-run competitive equilibrium equal to on typical firms average cost curve?
the minimum point
What is the effect of increased demand in long run?
Demand increases
Price increases
Therefore E/profit
Attracts new firms to market
Supply increases
Price decreases
No more e/profit
What is the effect of decreased demand in long run?
Demand decreases
Price creases
Therefore E/losses
Firms exit the market
Supply decreases
Price increases
No more e/losses
What is the long-run supply curve?
the curve showing relationship in the long run btw market price and quantity supplied
In the long run a perfectly competitive market will supply …. at a price …. on typical firm’s average cost curve
- whatever amount of product that consumers demand
2. determined by the min. point
The position of the long run supply curve is determined by…
the min. point on typical firm’s avg cost curve.
What are constant cost industries?
An industry in which a typical firm’s avg cost curve doesn’t change as industry expands production
What direction is the long-run cost curve of constant cost industries?
Horizontal
What direction is the long-run cost curve of increasing cost industries?
Upwardly sloping
What direction is the long-run cost curve of decreasing cost industries?
Downwardly sloping
What are the characteristics of perfectly competitive markets?
- no barriers to new firms entering the market
- no barriers to existing firms exiting the market
- many buyers and suppliers
- all parties are small relative to the size of the market
- all firms sell identical products
- all firms are PRICE TAKERS
What is the elasticity of perfectly competitive markets?
Perfectly Elastic
Demand Curve = Horizontal
What is a Price Taker?
A buyer/seller who is unable to affect the market price
What determines the market price in a perfectly competitive market?
the intersection btw supply curve and demand curve
What is formula for profit?
TR - TC
Using TR and TC, where is max profit?
Where the difference btw TR and TC is the greatest
What is formula for max profit?
MC = MR
Using TR and TC, where is max profit on a graph?
Where the vertical distance btw TR and TC curves is the largest
Profit maximising output/quantity is where…
MC = MR
What happens to profits if MC > MR?
Profits will decrease
What is formula for avg revenue?
TR / Q
What is avg revenue?
Revenue generated per unit
What is formula for MR?
Change in TR / Change in Q
What is MR?
Change in total revenue from the sale of 1 extra unit
In a perfectly competitive market, price is equal to…
= AR
= MR
Profit occurs when ____ > ATC
P
Break even occurs when ___ = ATC
P
Loss occurs when ____ > ATC
P
Formula for total profit
(P-ATC) x Q
Formular for profit per unit
P-ATC
A firm maximises profit at a level of output where
MR = MC
Why do firms break event when P = ATC?
Cost TC = TR
No e/profit
What is economic profit?
a firms total revenu less all costs , implicit and explicit
E/profit in a perfectly competitive market is….
only a short run occurrence
Why is e/profit in a perfectly competitive market is only a short run occurrence?
Cos e/profit leads to the entry of new firms into the market
What is the effect of entry of new firms on e/profit?
- supply increases
- supply curve shifts right
- price falls
- e/profit falls… suppliers break even
What is e/loss?
a situation where TR < TC
E/profit in a perfectly competitive market is….
only a short run occurrence
Why is e/lossin a perfectly competitive market is only a short run occurrence?
Cos e/loss leads to the exit of existing firms into the market
What is impact of fall in demand?
- demand falls
- demand curve shifts left
- price falls
- e/losses occur
What is productive efficiency?
a product produced using the least amount of resources
What is allocative efficiency?
when a production reflects consumer preferences
to some extent all products produced to point where MB = MC
What does the price of goods represent to consumers?
MB
In perfectly competitive markets, firms produce goods to a point where price =
MC
Firms will produce goods to point where…
MB=MC
What is Dynamic Efficiency?
when new tech/innovations are adopted over time
…firms adapt their product to changes in consumer taste
When striving for d/efficiency, what do firms use?
New tech, which reduces production costs and increases productivity
What do firms achieve by adapting products to consumer preferences?
Products goods that consumers most value
So, allocative efficiency
