Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
19 Cards in this Set
- Front
- Back
|
all feautures of a market that effect the behvior and performance of the firms within the market. for instance, number of sellers, extent of information, entry barriers, product differentiation
|
market structure
|
|
|
why is market structure important?
|
to examine firm behavior, industry output, efficiency (is there DWL, "best output"?), price-cost margins
|
|
|
market power
|
when the firm can influence the price of the product or the terms in which the product is sold
|
|
|
perfectly competitive market structure
|
firms have no/zero market power. There are many firms in the market. Each individual firm has no influence over the price, so they take the price as given (act as price takers). These firms can look at the market price and can choose the quantity it will produce. Each firm acts independently
|
|
|
Assumptions about Perfectly Compeitive Markets
|
1) Firms sell homogenous (same) goods. ex: oil, agri. products
2) consumers have perfect information 3) The individual firm's output is very small relative to industry output 4) Free entry and exit. Any entrepeneur can start up a firm in the industry |
|
|
Free entry
|
free for any one to enter the industry. EX: sandwhich shop, lemonade stand, web page, blog, photography
|
|
|
entry barrier examples
|
doctor, lawyer: quality restriction
oil drilling, car manufacturing: economics of scale, huge upfront costs |
|
|
what would happen if PC firms did not change the same price?
|
if you charged a higher price, no one would buy your goods. many perfect substitutes available for cheaper
|
|
|
Demand Curve for PC Markets
|
industry demand curve is still downward sloping, but the demand curve faced by any individual firm is horizonal (perfectly elastic - very sensitive to price)
|
|
|
Why does elastic demand curve for individual PC firms make sense?
|
law of demand still holds aggreate (as P goes up, Qd goes down), but if one firm raises prices, people will decrease Qd for that firm to zero (perfect subs are out there) ex: gas stations
|
|
|
should a PC firm produce anything at all in the short run?
|
the firm always has the option to make nothing at all. a firm should not produce anything (should shut down) if the price is less than the minimum AVC. in this case, the firm would take short run losses equal to its fixed costs
|
|
|
if a PC firm should produce in the short run, how much?
|
the firm should produce the quantity such that P=MR=MC
|
|
|
short run equilibrium for a PC industry
|
all firms produce equilibrium q to maximize profits. (q* such that P=MR=MC)
profit can be +, -, or 0 equilibrium is where industry demand is = to SR industry supply. |
|
|
short run supply curve for a PC firm
|
SR supply curve is the MC curve (marginal cost) above the minimum AVC
SRMC passes through minimum of both SRATC and SRAVC only produce when above minimum SRAVC |
|
|
long run decisions for a PC firm
|
firms can also enter or exit industry
assume that all firms have the same techonology and costs - if the industry is in short run equilibrium, all firms will have the same profits or losses in the short run, firms can only shut down (produce zero output) in the event of negative profits. in the long run, we now allow firms to enter and leave the industry in response to profit opportunities |
|
|
LR profit opportunites in a PC industry
|
if firms are making positive profits, then new firms will enter. profits are a signal for the entry of new firms and the industry will expand. Market supply shifts right and price will fall until profits are zero. If firms are making negative profits, then exisiting firms will exit. Losses are a signal for the exiiting of firms. The industry will contract (shrink). Market supply shift left and price will rise until profits are zero. As long as firms are entering and exiting, we are not in long run equilibrium.
|
|
|
Firm entry in PC indusdry
|
high profits cause firms to enter. when firms enter, maket supply shifts right and lowers prices. lower prices causes profits to fall
|
|
|
Firm exit in a PC industry
|
economic losses cause firms to exit. when firms exit, market supply shifts left, increasing the price. the higher price will increase profits for remaining firms
|
|
|
3 conditions for LR equilibrium of a PC industry
|
1) each firm is maximizing its profits (each firm chooses q* to produce, such that P=MR=MC)
2) economic profit that each firm is making is equal to zero 3) all firms are constant to stay in (or out of) the industry. 2 and 3 imply that price is equal to the minimum ATC of each firm(breakeven price), P= min ATC for each firm <-- no incentive to get in or out |
