Micro 3

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#2 characteristic for a firm in a price market to be a price taker

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a large number of firms exist in the market

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#3 characteristic for a firm in a price market to be a price taker

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Each firm supplies only a very small portion of the total amount supplied to the market

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#4 characteristic for a firm in a price market to be a price taker

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No barriers limit the entry or exit of firms in the market

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the incremental change in total revenue derived from the sale of one additional unit of a product

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marginal revenue

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Marginal revenue equation

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change in total revenue
divided by
change in output

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in the short run, the price taken will expand

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its output until marginal revenue (price) just equals marginal cost.
Will maximize the firm's profits (or minimize its losses)

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Profit is equal to

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difference between total revenue and total cost

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Suppose that market changes cause the price to drop below a firm's average total cost at all possible output levels. How will a profit maximizer (or loss minimizer) respond to this situation?

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1. continue to operate in the short run
2. shut down temporarily
3. go out of business

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a firm making losses will operate in the short run if it

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1. can cover its variable costs now
2. expects price to be held high enough in the future to cover all its costs

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a temporary halt in the operation of a firm. because the firm anticipates operation in the future, it does not sell its assets and go out of business.

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Shutdown*
This firm's variable cost is eliminated by the shutdown, but its fixed costs continue

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the sale of a firms assets and its permanent exit from the market. a firm is able to avoid its fixed cots, which would continue during a shutdown

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going out of business

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when the firms are price takers, the short run market supply curve is the

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horizontal summation of the marginal cost curves

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Since individual firms will supply a larger amount at a higher price, the short run market supply curve will

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slope upward to the right

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The two conditions necessary for long-run equilibrium in a price-taker market are depicted here

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1. quantity supplied and quantity demanded must be equal in the market
2. the firms in the industry must earn zero economic profit at the established market price

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Lower market demand will cause the price to

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fall and short-run losses to occur

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in the long run, the market supply will fall, causing

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the market price to rise

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the long run market supply curve shows

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the minimum price at which firms will supply various market output levels, given enough time to adjust the sizes of their plans (or other fized factors) and to enter or exit the industry.

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The shape of the long run market supply curve depends on what happens

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to the cost of production as the industry's output is altered.

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an industry for which factor prices and costs of production remain constant as market output is expanded

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constant-cost industry*
the long run market supply curve is therefore horizontal in these industries

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An industry for which costs of production rise as output is expanded. In these industries, even in the long run higher market prices will be needed to induce firms to expand total output.

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Increasing-cost industry*
As a result, the long-run market supply curve in these industries will slope upward to the right

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An industry for which costs of production decline as the industry expands. The market supply is therefore inversely related to price.

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Decreasing-cost industry*
atypical

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the elasticity of the market supply curve usually increases when

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suppliers have more time to adjust to a change in the price

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because it is less costly to expand output slowly in response to a demand increase,

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the expansion of output by firms will increase with time, as long as the price exceeds the cost
*therefore, the elasticity of the market supply curve will be greater when firms have more time to adjust their output

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In essence, profit is a reward that business owners will earn if

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they produce a good that consumers value more than the resources required for the goods production

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in contract, losses are a

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penalty imposed on businesses that reduce the value of resources

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firms that anticipate correctly the products and services for which future demand will be most urgent

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and produce and market them efficiently will make economic profits.
those that are inefficient and allocate resources incorrectly to areas of weak demand will be penalized with losses

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A market in which the firms have a downward-sloping demand curve, and entry into and exit from the market are relatively easy

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competitive price-searcher market

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products distinguished from similar products by characteristics like quality, design, location, and method of promotion

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differentiated products

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markets that are characterized by

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1.low entry barriers
2. firms that face a downward-sloping demand curve (competitive price-searcher market)

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A term often used by economists to describe markets characterized by a large number of sellers that supply differentiated products to a market with low barriers to entry.

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Monopolistic competition*
Essentially, it is an alternative term for a competitive price-searcher market

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Any firm can increase profits by expanding output as long as

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marginal revenue exceeds marginal cost.

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A price searcher will lower price and expand output until

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marginal revenue is equal to maginal cost

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A price searcher maximizes its profits by

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producing outputs and charging price

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Firms in competitive price searcher markets can make either economic profits or losses in the short run. But, after long run adjustments occur,

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only a normal profit(zero economic profit) will be possible because entry barriers are low and competition is strong

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a market in which the costs of entry and exit are low, so a firm risks little by entering. efficient production and zero economic profits should prevail

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contestable market

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is necessary when there no decision rule tan can be applied using only information that is freely available.

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Entrepreneurial judgment*
For this reason, we are unable to incorporate fully the function of the entrepreneur into economic models

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to be successful, entrepreneurs must consistently

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offer consumers at least as much value for their dollar as they can get elsewhere

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a practice whereby a seller charges different consumers different prices for the same product or service

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price discrimination

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to gain from price discrimination, price searchers must be able to do things

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1. identify and separate at least two groups with differing elasticities of demand
2. prevent those who buy at the low price from reselling to the customers charged higher prices

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if potential customers can be segmented into groups with different elasticities of demand and retrading can be controlled at a low cost, sellers can often

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gain by charging higher prices to those with less elastic demand (and lower prices to those with a more elastic demand)

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price discrimination can also increase the total gains from trade and thereby

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reduce allocative inefficiency. sometimes it even allows production where none would have otherwise occurred

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In competitive price taker markets, firms

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can sell all of their output at the market price

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In price taker markets, individual firms have no control over price. Therefore, the firm's marginal revenue curve is

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constant at the market price of the product.

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If marginal revenue exceeds marginal cost, a profit maximizing price taker firm should

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expand output

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Which of the following is the best example of a business firm operating in a competitive price-taker market?

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a Traverse City cherry grower.

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Competition as a dynamic process implies that individual firms in an industry

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utilize a variety of techniques, such as product, style, and price to win the dollar votes of consumers.

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is always true in competitive price-taker markets?

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Barriers to entry into the market are low.

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In short run equilibrium, a competitive price taker firm

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may earn a profit or incur a loss.

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A profit maximizing wheat farmer will expand output until

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the firm's marginal cost of production is equal to price

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Profit maximizing firms enter a competitive market when, for existing firms in the market,

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price exceeds average total cost.