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13 Cards in this Set
- Front
- Back
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Characteristics of a Competitive Market
1. How many buyers and sellers? 2. The goods offered are largely ___?___. 3. What are buyers and sellers a in competitive market? 4. Geneally, the price per unit sold is ___?___. 5. Do firms enter and exit the market? 6. What is a competitive market? |
1. Many buyers and many sellers
2. The same 3. Price takers - they take the price as given 4. Constant 5. Yes, they enter and exit freely 6. A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. |
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The Revenue of a Competitive Market
1. Profit =? 2. Total Revenue (TR) =? 3. Average Revenue (AR) =? 4. Marginal Revenue (MR) =? 5. In a competitive market, the AR and MR for all firms will always equal? |
1. Total Revenue - Total Cost
2. Price x Quantity 3. Total Revenue / Quantity 4. The change in TR / change in Q 5. The Price of the good |
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Profit Maximization
1. What is the goal of a competitive firm? 2. What are Fixed Costs? 3. What are Variable Costs? 4. Total Cost (TC) =? 5. Marginal Cost (MC) =? 6. If MR > MC then? 7. If MC > MR then? |
1. To maximize profit
2. Costs that DONT vary with the quantity of a good produced (ie rent, full-time bookkeeper hired to pay bills, etc) 3. Costs that vary with the quantity of a good that is produced (Example for a coffee shop = coffee beans, sugar, paper cups, etc) 4. Fixed Costs + Variable Costs + Oppotunity Costs 5. Change in TC / Change in Q 6. Increase Q to raise profit 7. Decrease Q to raise profit |
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The Marginal-Cost Curve and The Firm's Supply Decision
1. How many features do Cost Curves have and what are they? 2. What shape is the Marginal-Cost Curve (MC)? 3. What shape is the Average Total Cost Curve (ATC)? 4. What shape is the Market Price (P) line, and why is it this shape? 5. Where does the MC curve cross the ATC curve at? 6. The profit-maximizing quantity (Q max) is found where? 7. At the profit-maximizing level of output, marginal revenue and marginal cost are? 8. What determines the quantity of a good a competitive firm is willing to supply at any price? 9. In essence, because of this^, the MC Curve is also the competitive firm's what? |
1. Three, MC, ATC, and P
2. Upward Sloping 3. U-shaped 4. Horizontal, because the firm is a price taker which means the price of the firm's output is the same regardless of the quantity the firm decides to produce 5. At the minimum of ATC 6. Q max is found where the horizontal price line (P) intersects with the marginal-cost curve (MC) 7. Exactly equal 8. The MC Curve 9. Supply Curve |
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The Firm's Short-Run Decision to Shut Down
1. What is a Shutdown? 2. What is an Exit? 3. The short-run vs long-run decision differs because? 4. What is a Sunk Cost? 5. What are the Pro's and Con's for a firm to shut down? 6. What formula is used by firms to decide if they should shut down? 7. In the Short-Run, what is a competitive firms supply curve? |
1. A Shutdown refers to a short-run decision not to produce anything during a specific period of time because of current market conditions
2. An Exit refers to a long-run decision to leave the market 3. Because most firms cannot avoid their fixed costs in the short run but can do so in the long run 4. A cost that has already been committed and cannot be recovered 5. The firm loses all of its revenue (TR), but the firm also does NOT have to pay any variable costs (VC). 6. Shut Down if the Price (P) < Average Variable Cost (AVC). The original formula is Shutdown if TR<VC -----> TR/Q<vc /> P<AVC. 7. It is the portion of its MC Curve that lies above AVC |
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Spilt Milk and Other Sunk Costs
1. How are Sunk Costs considered when making decisions about various aspects of life, including business strategy, like when a firm decides if it should shut down or not? 2. If you place a $15 value on seeing a movie and buy your ticket at the theater for $10 but then lose the ticket before you can enter, should you buy another ticket or go home and refuse to pay a total of $20 to watch the movie? |
1. Sunk Costs are ignored when making decisions because nothing can be done about them.
2. You should buy another ticket because the benefit of seeing the movie ($15) still exceeds the opportunity cost (The $10 for the second ticket). The $10 you paid for the lost ticket is a sunk cost and should not be considered when making your decision. |
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The Firm's Long-Run Decision to Exit or Enter a Market
1. What are the Pro's and Con's for a firm to Exit? 2. What formula is used by firms to decide if they should Exit? 3. What formula is used by an entrepreneur to decide if he should Enter the market? 4. In the Long-Run, what is a competitive firm's supply curve? |
1. The firm will lose all its revenue but it wont have to pay its variable costs and its fixed costs.
2. Exit if the Price (P) < Average Total Cost (ATC). The original formula is Exit if TR<TC -----> TR/Q<TC/Q -----> P<ATC. 3. He will Enter the market if P>ATC, the exact opposite of the Exit formula. 4. It is the portion of its MC Curve that lies above ATC |
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Measuring Profit in Our Graph for the Competitive Firm
1. The formula for Profit is TR - TC, but what is the formula to use for Profit to allow yourself to measure profit in your graph? 2. When finding the profit in a graph, what determines the height, width, and area of the rectangle? 3. When a firm loses money, how do they determine how to minimize their losses? 4. When finding the losses (negative profit) in a graph, what determines the height, width, and area of the rectangle? 5. On a graph, what determines the total amount of profit or loss for the firm? |
1. Profit = (P-ATC) x Q. The steps used to get here are: Profit= TR-TC -----> Profit= (TR/Q - TC/Q) x Q -----> Profit= (P - ATC) x Q
2. Height = P-ATC ----- Width = Q ----- Area = (P-ATC) x Q 3. They produce the quantity at which the P=MC. (Same as Profits) 4. Height = ATC-P ----- Width = Q ----- Area = (ATC-P) x Q 5. The Area |
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The Short Run: Market Supply with a Fixed Number of Firms
1. Over short periods of time, it is ___?___ for firms to enter and exit a competitive market? 2. What do you do to derive the market supply curve? |
1. Difficult
2. Add the quantity supplied by each firm in the market. (i.e. 5 identical toy firms, each produce 40 toys, the quantity supplied to the market is 200) |
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The Long Run: Market Supply with Entry and Exit
1. Over long periods of time, what happens to the number of firms in a competitive market? *Questions 2- are based on the scenario that everyone has access to the same technology for producing the good and access to the same markets to buy the inputs into production. Therefore, all firms and all potential firms have the same cost curve* 2. If the existing firms in a competitive market are making profit, what happens? 3. If the existing firms in a competitive market are losing money, what happens? 4. At the end of this process of entry and exit, firms that remain in the market must be... 5. The process of entry and exit ends only when... 6. When a firm is operating at the minimum of average total cost, ______ is equal to ______. 7. The level of production with lowest average total cost is called the firm's ___?___. 8. In the long-run equilibrium of a competitive market with free entry and exit, firms must be... 9. In a market where all firms are |
1. In a competitive market, the number of firms can adjust to changing market conditions.
2. No existing firms leave the market and new firms join the market, causing and increase in supply which drives down prices and profits. 3. Some existing firms will leave the market and no new firms join the market, causing a decrease in supply which leads to an increase in prices and profits. 4. making zero economic profit. 5. price and average total cost are driven to equality. 6. Marginal Cost, Average Total Cost 7. efficient scale 8. operating at their efficient scale 9. have no incentive to exit the market, have no incentive to enter the market. 10. The minimum of average total cost; The long-run market supply curve must be horizontal at this price. 10. Yes, there are enough firms to meet the demand at this price; Demand Curve=Downward; Supply Curve=Upward. |
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Why Competitive Firms Stay in Business When They Make Zero Profits
1. In the zero-profit equilibrium, what is the firms economic profit? What is the firms accounting profit? |
1. Economic = zero; Accounting = positive
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A Shift in Demand in the Short Run and Long Run
1. Because firms can enter and exit in the long run but not in the short run, the response of a market to a change in demand depends on the ______. 2. If a market is in a long term equilibrium and the demand for that good increases, what happens? 3. After Question #2^ happens, the profit the existing firms are making causes new firms to enter the market, what happens? |
1. time horizon
2. The demand curve shifts outward, and in the new short term equilibrium the price of the good exceeds the average total cost, so the firms are making a positive profit. 3. The short-run Supply Curve shifts to the right. The shift causes the price of the good to fall. Eventually the price is driven back down to the minimum of average total cost, profits are zero, and firms stop entering. Thus, the market reaches a new long-run equilibrium where the price is back to it started at but the supply is now greater that it was originally in the first long-run equilibrium, and each firm is producing at its efficient scale, but because more firms are in the market, the quantity of the good being produced and sold is higher. |
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Why the Long-Run Supply Curve Might Shift Upward
1. What are the two reasons that the long-run market supply curve might shift upward? |
1. First reason is that some resource used in production is available only in limited quantities. I.E. Anyone can chose to become a farmer and buy a farm but the quantity of farm land is limited. As more people become farmers, farm land is bid up, causing the costs for farmers to rise. An increase in demand for farm products can not induce an increase in quantity supplied without also inducing an increase in rise in farmers' cost, which in turn means a rise in price. The result is a long-run market supply curve that is sloping upward, even with free entry into farming.
The second reason is that firms may have different costs (i.e. painters; some work faster, some people have better uses for their time). For any given price, those with lower costs are more likely to enter the market than those with higher costs. To increase the quantity of people in that market, additional entrants must be encouraged to enter the market. Because these new entrants have higher costs, prices must rise to make entry profitab |
