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17 Cards in this Set
- Front
- Back
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Perfect Competition |
1. free entry and exit 2. homogeneous product 3. many buyers and sellers ex. agriculture |
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Price Taker |
take market prices as given; no higher/lower; have no market power to influence price |
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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) |
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Profit Maximization |
Total profit = TR - TC 1. Find where TR - TC is largest 2. Marginal approach marginal profit = MR - MC |
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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 |
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Breakeven point |
what if p* falls to a point where at Q* = 0 at that point, p* = MC = ATC |
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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!!!!!!!!! |
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AT SHUT DOWN POINT |
p* = MC = AVC and AR = AVC |
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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 |
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Determinants of Supply |
Resource prices |
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To find Market Supply |
sum of all individual firm's supply curves |
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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 |
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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 |
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Short Run |
# of firms is fixed factor # and size is fixed |
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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 |
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If demand increases If p* increases Price decreases |
p* increases incentive for firms to enter supply increases |
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Long run market supply curve |
connects all LR equilibrium -> horizontal line at p* ONLY TRUE FOR CONSTANT COST INDUSTRIES |
