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17 Cards in this Set

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Perfect Competition

1. free entry and exit


2. homogeneous product


3. many buyers and sellers




ex. agriculture

Price Taker

take market prices as given; no higher/lower; have no market power to influence price

Total Revenue =




Average Revenue =




Marginal Revenue =

Price x Quantity Sold




revenue per unit (TR/Q)




extra revenue from selling extra unit (change of TR/ change of Q)

Profit Maximization

Total profit = TR - TC




1. Find where TR - TC is largest


2. Marginal approach


marginal profit = MR - MC

Marginal Profit

= MR - MC


(extra revenue - extra cost)




make and sell if MR > or = MC; STOP if MC > MR


or in other words: profits are maximized when MR = MC; PC Market: p* = MC

Breakeven point

what if p* falls to a point where at Q* = 0




at that point, p* = MC = ATC

At what point does the firm shut down?

If P >/= AVC -> operate


If P < ATC -> SHUT DOWN




AS LONG AS... TR>VC (or AR >/= AVC)


KEEP OPERATING!


If VC > R or AVC > AR


firm can no longer pay workers, buy raw materials, etc. = SHUT DOWN!!!!!!!!!

AT SHUT DOWN POINT

p* = MC = AVC




and




AR = AVC

Supply Curve Shows

the quantity that a firm is willing and able to sell at each possible price


-> entire Marginal Cost curve above and including the Shutdown point

Determinants of Supply

Resource prices

To find Market Supply

sum of all individual firm's supply curves

Long Run Profit Maximization in Perfect Competition

Capital is a variable, firms can come and go




-> Can't just add up supply curves to find market supply




INSTEAD - study long run equilibrium

Long Run

1. Firms are identical


2. Firms can enter/exit


3. Industry is "constant cost"


-> resource prices are NOT affected by firm entry/exit

Short Run

# of firms is fixed


factor # and size is fixed

Long Run Equilibrium

1. all firms are profit maximizing


2. Qs = Qd


3. no firm has incentive to enter or exit




If demand increases, p* increases


If p* increases, incntive for firms to enter



If demand increases




If p* increases




Price decreases

p* increases




incentive for firms to enter




supply increases

Long run market supply curve

connects all LR equilibrium


-> horizontal line at p*




ONLY TRUE FOR CONSTANT COST INDUSTRIES