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28 Cards in this Set
- Front
- Back
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5 Conditions of a perfectly competitive market |
1. large # of buyers and sellers 2. individual firm insignificant 3. Standardized (homogeneous) product 4. Easy entry and exit (free entry) 5. perfect information regarding products and prices |
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Why study PC market structure? |
best model for production even if conditions aren't perfect |
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PC firms are _____ and have ______ |
price takers, perfectly elastic demand curves |
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phrase that pays |
Northwestern will decrease in returns Illinois |
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profit = |
TR - TC |
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TR = |
P * Q |
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For a PC Firm, produce where |
MR = MC |
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If, at a given Q for a PC firm, MR > MC, |
produce that unit |
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If, at a given Q for a PC firm, MR < MC, |
do NOT produce that unit |
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Why should you increase production if MR > MC? |
At Q1, TR increases faster than TC, so producing another unit will increase profit. |
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Why should you decrease production id MR |
At Q2, TC decreases faster than TR, so producing one less unit will increase profit. |
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Where will you find the maximum profit on a TR and TC curve graph? |
Where the slopes of the TR line and TC curve are equal |
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For a PC firm, D = |
MR = P |
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Be able to Derive the profit on a PC Firm Graph |
Profit = TR - TC Avg Profit = TR/Q - TC/Q Avg Profit = P - AC Avg Profit = X -Y Profit(0) = (X - Y)Q(0) Profit(0) = (P0 - Z)Q(0) = AREA P0XYZ |
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PE(A) = A |
Loss = AREA ABCF |
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When will a firm shut down? |
When TR = 0 and TVC = 0 |
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What is the loss of a PC firm if it shut down? |
Profit = -FC |
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Shut down rule for a PC firm |
Stay open in SR if P > AVC (or TR > TVC) Shut down if P < AVC (or TR < TVC) |
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SR Supply curve of a PC firm is |
0 if P < min AVC MC Curve id P > min AVC |
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What should a firm do if P(0) is above min AC |
Choose Q where MR=MC will stay open because making a positive profit |
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P between min AVC and min AC |
Stay open because P above min AVC loss, but less loss than shut down |
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What if a firm is making a loss in the short run? |
Cannot exit in SR since K is fixed |
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In LR equilibrium of a PC industry, where will the price be dirven? |
The price will be driven to the minimum of the LRAC curve |
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Why does the price fall to minimum LRAC in the long run? |
More firms with the same resources and skills could do better here by definition of economic profit, causing the supply curve to shift to the right until P = min LRAC |
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Why is it okay to stay open when economic profit is 0? |
Because accounting profit is greater than 0 |
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In LR equilibrium, what optimal plant size are firms forced to build? |
The one that gives minimum SRAC |
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What is the economically efficient outcome? |
Since P=MC=Min SRAC = Min LRAC, the output of a PC industry is produced at the lowest psooble cost. |
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In the Long Run, Profit Maximizing Monopolist make what kind of profits? |
Zero or Positive economic profits |
