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16 Cards in this Set
- Front
- Back
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Perfect Competition Characteristics
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1. Price taking consumer / producer
2. Small market share 3. Standardized product - commodity 4. Free entry and exit |
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Profit Maximization by a PC firm
(Optimal Output Rule) |
OPTIMAL OUTPUT RULE: Profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to marginal revenue. (MR=MC)
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Alternative Rule
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We maximize profit at the largest quantity where marginal revenue is bigger than marginal cost.
MR>MC |
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Shut Down Decision - Short Run
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P>minAVC - Stay Open - covers VC and some FC
P=minAVC - Breakeven - covers VC P<minAVC - Shutdown - doesn't cover VC P>minATC - Stay Open - covers all VC and FC Production will cease if the market price falls below the shut-down price. OR VC>TR |
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PC Firm Short Run Supply Curve
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Supply Curve = MC
Shows how a firm produces optimal output quantity depends on the market price, taking fixed costs as given. |
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PC Industry Short Run Supply Curve
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Shows the quantity supplied by an industry depends on the market price given a fixed number of producers.
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Long Run Decision of Whether or Not to Stay in the Market
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A fall in price induces producers to exit, generating a fall in industry output and a rise in price.
If TR would be less than its TC no matter what Q is produced. Exit if: TR<TC TR/Q < TC/Q P<ATC |
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Market Share
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A producer's fraction of the total industry output.
A small market share is considered to be between 0 and 1. |
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Production and Profits
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Produce a quantity where profit peaks
TR>TC - Profitable TR=TC - Breaks Even TR<TC - Incurs a Loss |
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Fixed Costs (Short Run)
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Do not affect a firm's decision on whether to stay open or shut down.
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Entry and Exit of Firms in the Long Run (PC)
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P>minATC - New firms will enter
P<minATC - Firms will exit P=minATC - Firms will stabilize, making this the long run price! |
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Long-Run Equilibrium
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P = MR = MC = ATC
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Long-Run Effect of an Increase in Demand (PC)
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1. The price is unchanged
2. Each firm's output is unchanged 3. The number of firms increases 4. Industry output increases. |
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Break-Even Price And Profitability (PC Firm)
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The market price at which it earns zero profit.
P>minATC - profitable - entry to industry in long run P=minATC - breaks even - no entry or exit in long run P<minATC - unprofitable - exit in long run |
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Short-Run Market Equilibrium (PC)
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When the quantity supplied equals the quantity demanded, taking the number of producers as given.
Qs=Qd |
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Long-Run Industry Equilibrium
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1. When the Q supplied = the Q demanded. Given that sufficient time has elapsed for entry into and exit from the industry to occur.
2. Value of MC is the same for all firms. 3. Each firm has 0 economic profits. 4. Market equilibrium is efficient (no mutually beneficial transactions go unexploited) |
