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24 Cards in this Set
- Front
- Back
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Competitive Market
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A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker
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Average Revenue
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Total Revenue divided by the Q sold
Avg. Revenue equals the selling price of the good |
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Marginal Revenue
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Change in total revenue from an additional unit sold
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For competitive firms what does the marginal revenue equal and why?
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marginal revenue equals the price of each good because with an increase in 1 unit Total revenue will rise by the set market price
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3 General Rules for Profit Maximization
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If marginal revenue is greater than marginal cost, the frim SHOULD increase it's output
If marginal cost is greater than marginal revenue, the firm should DECREASE its output At the profit-maximizing level of output, marginal revenue and marginal cost are exactly the equal |
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Because a competitive firm is a price taker, its marginal revenue equals the market price. For any given price, the competitive firm's profit maximizing quantity of output is found by looking at the intersection of the price with the marginal cost curve.
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true
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The marginal cost curve is also a competitive firm's supply curve? why?
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true
because the firm's marginal cost curve determines the quantity of the good the firm is willing to supply at any price pg 295 |
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A firm will shut down in the short run if what is less than what?
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1. TR < VC
2. TR (P*Q)/Q < VC/Q <b>3. P < AVC A firm chooses to shut down if the price of the good is less than the average variable cost of production. The competitive firm's short run supply curve is the portion of its marginal cost curve that lies above average variable cost (pg. 296 |
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Sunk Cost
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A cost that has already been committed and cannot be recovered
These sunk costs must be ignored in strategy/decision making because they are unrecoverable--eg fixed costs in the short run should be irrelevant in decision making because no matter what you do you still have to pay them. Thats why you compare price to Average variable cost (see prev. card) |
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The firm exits a market if the revenue it would et from producing is less than its total _____
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Costs
1. Exit if TR < TC 2. TR/Q < TC/Q <b>3. P < ATC The competitve firm's long-run supply curve is the section of its marginal cost curve that is situated above the Average Total Cost Curve (ATC) |
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Enter the market if....
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P > ATC
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Follow this--
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1. Profit = TR - TC
2. Profit = (TR/Q - TC/Q) * Q 3. <b>Profit = (P - ATC) * Q Loss = (ATC - P) * Q Allows us to measure profits in our graphs (pg. 300) |
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Review page 300 Figure 5
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Do it Now!
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Market Power
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if a firm can influence the market price of the good it sells
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Shutdown
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if the firm shuts down it loses all revenue from the sale of its product, and still has to pay its fixed costs (FC sunk in this instance)
Thus the firm shuts down if the revenue that it would get from producing is less than its variable costs of production a short run decision not to produce anything during a specific period of time bc of current market conditions Firm still has to pay fixed costs |
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Exit
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a long run decision to leave the market.
Firm doesnt have to pay fixed costs or any costs at all |
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If the firm produces anything it produces the quanitty at which arginal cost equals the price of the good. Yet if the price is less than average variable cost AT that quantity, the firm is better off shutting down and not producing anything.
The competive firm's short run supply curve is the portion of its marginal cost curve that lies ABOVE the average variable cost curve |
true
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The competitive firm's long-run supply curve is the portion of its marginal cost curve that lies above average total cost
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true
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Review pg 297
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now
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In the Short run the number of firms in a market is usually fixed
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true
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At the end of the process of entry and exit, firms that remain in the market must be making zero economic profit
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true
If price is above average total cost, profit is positive which encourages new firms to enter. If price is les than average total cost, profit negative, which encourages some firms to exit. <b>The process of entry and exit ends only when price and average total cost are driven to equality |
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2 reasons why the long run market supply curve might slope upward
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1. Some resource used in production may be available only in limited quantities.
2. firms may have different costs |
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Because firms can enter and exit more easily in the long run than in the short run, the long run supply curve is typically more elastic than the short run supply curve
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True
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Review Pages 301-307
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please
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