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43 Cards in this Set

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Perfect Competition
A market structure in which the decisions of individual buyers and sellers have no effect on market price
Perfectly Competitive Firm
A firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells
Price Taker
A competitive firm that must take the price of its product as given because the firm cannot influence its price
Why a perfect competitor is a price taker
Large number of buyers and sellers
Homogenous products are perfect substitutes
Buyers and sellers have equal access to information
No barriers to entry or exit
Perfect competitor accepts price as given
Firm raises price, it sells nothing
Firm lowers its price, it earns less revenues than it otherwise would
Perfect competitor has to decide how much to produce
Firm uses profit-maximization model
Total Revenues
The price per unit times the total quantity sold
The same as total receipts from the sale of output
Profit
Total revenue- total cost
Profit-Maximizing Rate of Production
The rate of production that maximizes total profits, or the difference between total revenues and total costs
Also, the rate of production at which marginal revenue equals marginal cost
Marginal Revenue
The change in total revenues divided by the change in output
Marginal Cost
The change in total cost divided by the change in output
Profit maximization occurs at the rate of output at which ....
marginal revenue equals marginal cost
To find out what our competitive individual flash drive producer is making in terms of profits in the short run, we have to determine the
excess of price above average total cost
Graphical depiction of maximum profits and graphical depiction of minimum losses
The height of the rectangular box in the previous figure represents profits per unit.
The length represents the amount of units produced.
When we multiply these two quantities, we get total economic profits.
Short-run average profits are determined by comparing
ATC with P = MR = AR at the profit-maximizing Q.
In the short run, the perfectly competitive firm can make either
economic profits or economic losses.
As long as the price per unit sold exceeds the _____________ produced, the earnings of the firm’s owners will be higher if it continues to produce in the short run than if it shuts down.
average variable cost per unit
Short-Run Break-Even Price
The price at which a firm’s total revenues equal its total costs
At the break-even price, the firm is just making a normal rate of return on its capital investment (it’s covering its explicit and implicit costs)
Short-Run Shutdown Price
The price that just covers average variable costs
It occurs just below the intersection of the marginal cost curve and the average variable cost curve
Why produce if you are not making a profit?
Distinguish between economic profits and accounting profits.
Remember when economic profits are zero a firm can still have positive accounting profits.
What does the short-run supply curve for the individual firm look like?
The firm’s short-run supply curve in a competitive industry is its marginal cost curve at and above the point of intersection with the average variable cost curve.
The Industry Supply Curve
The locus of points showing the minimum prices at which given quantities will be forthcoming
Also called the market supply curve
Factors that influence the industry supply curve (determinants of supply)
Firm’s productivity
Factor costs
Wages, prices of raw materials
Taxes and subsidies
Number of seller
How is the market, or “going,” price established in a competitive market?
This price is established by the interaction of all the suppliers (firms) and all the demanders.
The competitive price is determined by the intersection of the market demand curve and the market supply curve.
The market supply curve is equal to the horizontal summation of the supply curves of the individual firms.
Profits and losses act as ____for resources to enter an industry or to leave an industry
signals
Signals
Compact ways of conveying to economic decision makers information needed to make decisions
An effective signal not only conveys information but also provides the incentive to react appropriately.
Exit and entry of firms
Economic profits
Signal resources to enter the market
Economic losses
Signal resources to exit the market
Allocation of capital and market signals
Price system allocates capital according to the relative expected rates of return on alternative investments.
Investors and other suppliers of resources respond to market signals about their highest-valued opportunities.
Tendency toward equilibrium (note that firms are adjusting all of the time)
At break-even, resources will not enter or exit the market.
In competitive long-run equilibrium, firms will make zero economic profits.
Long-Run Industry Supply Curve
A market supply curve showing the relationship between prices and quantities after firms have been allowed time to enter or exit from an industry, depending on whether there have been positive or negative economic profits
Constant-Cost Industry
An industry whose total output can be increased without an increase in long-run per-unit costs
Its long-run supply curve is horizontal
Increasing-Cost Industry
An industry in which an increase in industry output is accompanied by an increase in long-run per unit costs
Its long-run industry supply curve slopes upward.
Decreasing-Cost Industry
An industry in which an increase in industry output leads to a reduction in long-run per-unit costs
Its long-run industry supply curve slopes downward.
Long-Run Equilibrium
In the long run, the firm can change the scale of its plant, adjusting its plant size in such a way that it has no further incentive to change; it will do so until profits are maximized.
In the long run, a competitive firm produces where price, marginal revenue, marginal cost, short-run minimum average cost, and long-run minimum average cost are equal.
Marginal Cost Pricing
A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question
The opportunity cost is the marginal cost to society.
Market Failure
A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity
The characteristics of a perfectly competitive market structure
Large number of buyers and sellers
Homogeneous product
Buyers and sellers have equal access to information
No barriers to entry and exit
How a perfectly competitive firm decides how much to produce
Economic profits are maximized when marginal cost equals marginal revenue as long as the market price is not below the short-run shutdown price, where the marginal cost curve crosses the average variable cost curve.
The short-run supply curve of a perfectly competitive firm
The rising part of the marginal cost curve above minimum average variable cost
The equilibrium price in a perfectly competitive market
A price at which the total amount of output supplied by all firms is equal to the total amount of output demanded by all buyers
Incentives to enter or exit a perfectly competitive industry
Economic profits induce entry of new firms.
Economic losses will induce firms to exit the industry
The long-run industry supply curve and constant-, increasing-, and decreasing-cost industries
The relationship between price and quantity after firms have been able to enter or exit the industry
Constant-cost industry
Horizontal long-run supply curve
Increasing-cost industry
Upward-sloping long-run supply curve
Decreasing-cost industry
Downward-sloping long-run supply curve