Week 5 - Firms in Perfectly Competitive Markets Flashcards
What are the three characteristics of an industry?
- The number of firms in the industry.
- The similarity of the good or service produced by the firms in the industry.
- The ease with which new firms can enter the industry.
What are the three conditions that make a perfectly competitive market?
- There are many buyers and sellers, all of whom are small relative to the market.
- All firms sell identical products.
- There are no barriers to new firms entering the market or to existing firms leaving the market.
- Examples include apples and wheat.
What are the characteristics of a perfectly competitive firm?
- Cannot affect the market price.
- Is a price taker (a buyer or seller that is unable to affect the market price, takes the price from the market).
- The demand curve for a price taker (firm) is horizontal, or perfectly elastic as every unit must be sold at the same given price.
- Since producers in a perfectly competitive market can sell as much produce as they wish to at the same constant price.
For a perfectly competitive firm, price = ___
Price = AR = MR
What is marginal revenue (MR)?
The extra revenue from selling an additional unit.
How is marginal revenue (MR) calculated?
MR = Change in total revenue / change in quantity.
What is average revenue?
The revenue per unit (total revenue divided by quantity).
How is average revenue calculated?
AR = TR / Q, so AR = PxQ / Q = P
What is the profit-maximising level of output?
The profit-maximising level of output is where the difference between total revenue and total cost is the greatest. The profit-maximising level of output is also where marginal revenue equals marginal cost.
Profit is maximised at MR=MC.
How is profit/loss calculated?
- Profit: total revenue (TR) minus total cost (TC).
- Profit = TR – TC
If MR < MC, the extra revenue from selling one more unit ______ the extra cost incurred to produce it.
If MR < MC, the extra revenue from selling one more unit is less than the extra cost incurred to produce it. Economic profit increases if output decreases.
If MR > MC, the extra revenue from selling one more unit ______ the extra cost incurred to produce it.
If MR > MC, the extra revenue from selling one more unit exceeds the extra cost incurred to produce it. Economic profit increases if output increases.
What is breaking even?
P = ATC (per unit cost equals per unit revenue. Thus, the firm’s total cost equals its total revenue).
If MR = MC, the extra revenue from selling one more unit ______ the extra cost incurred to produce it.
If MR = MC, the extra revenue from selling one more unit is equal to the extra cost incurred to produce it. Economic profit is maximised.
There is economic profit when…
P > ATC
There is economic loss when…
P < ATC
What are the two choices a firm can make when suffering losses in the short run (P < ATC)?
o Continue to produce (if P > AVC) or
o Stop production by shutting down temporarily (if P < AVC).
What is the shutdown point?
The minimum point on a firm’s average variable cost curve (P = min AVC).
