72 terms

Ch. 23: Perfect Competition

STUDY
PLAY
Market Structure: ____ features of a market that effect the _______ and ________ of the firms within the market
all; behavior; performance


# of sellers, extent of info, entry barriers, and product differentiation
Why is market structure important?
Predict:
-firm behavior
-output
-efficiency
-price cost margins
Market Power
when the firm can influence the price of the product or the terms in which the product is sold
In a competitive market, _____ ____ will have market power
each firm
In a non-competitive market, the ______ _______ will have market power
individual firm
Perfect Competition
a market structure in which the decisions of individual buyers and sellers have no effect on market price
Perfectly Competitive Firm
firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells
Price Taker is a _________ firm that must take the _______ of its product as given because the firm __________ influence its _________
competitive; price; cannot; price
Is a Perfect Competitor a Price Taker? Why/Why not?
Yes;

1) large number of buyers and sellers
2) homogenous products (wheat,corn)
Free entry means that _______ can start a firm in the industry
anyone
Free Entry Examples
sandwich shop, sell crafts, photographer, webpage, android apps
Entry Barrier Examples
car manufacturing, diamond mining, gasoline production
If the perfectly competitive firm is a price taker, selling _________ commodity with ________ substitutes, then the individual firm faces a perfectly _________ demand at the going market price
homogenous; perfect; elastic
Demand Curve of the Perfect Competitor (Price Taker)
Perfectly elastic; horizontal line

consumers are sensitive to the firm's price
How is the going (market) price established in a competitive market?
by the interaction of all the suppliers and demanders
A perfect competitor accepts price if: firm raises price, it sells _______; firm lowers price, it earns _______ profit
nothing; less
To decide how much to produce, perfect competitors use the _______ _______ mode
profit-maximization
Profit Function
Pi = TR - TC
Losses occur when profits are _______
negative
Total Revenue Function
TR = P x Q

market chooses P; firm chooses Q
Total Cost Function
TC = TFC + TVC
To find optimal profit when looking at TR and TC, find the _______ gap between the two where ______ > ________
biggest; TR; TC
To find optimal profit using marginal analysis, find the output where ______ = _______
MR; MC
Marginal Revenue
change in total revenue divided by the change in output

MR = change in TR/change in Q
Marginal Cost
change in total cost divided by the change in output

MC = change in TC/change in Q
For a perfectly competitive firm, MR = _______
price
In a perfectly competitive market, an individual firm ______ affect the market price, no matter how much it sells. Thus, the additional revenue from selling an additional unit is _______ to that market price
cannot; equal
Profit maximization occurs at the output where the ______ between TR and ______ is the _______
gap; TC; biggest

MR=MC
For a competitive firm, this means that profit maximization occurs where P = _____ = M__
MR; MC
Short run average profits are determined by comparing ______ with ____ at the profit-maximizing ____. In the short run, the perfectly competitive firm can make either economic _______ or economic ________
ATC; P; Q; profits; losses
Short Run Profit Equation
pi = q [P - ATC(q*)]

profit equals number of units sold multiplied by the average profit per unit
ATC is a ____ shaped function
U
Graph a Firm's SR Profit
p 185
MC runs through the __________ of SRATC
midpoint
Graph a Competitive Firm making an Economic Loss
p 186
As long as the loss from staying in business is _____ than the loss from shutting down, the firm will ________ to produce
less; continue
If a firm goes bankrupt, they must ______ EVERYTHING
sell
A firm exits the industry when the owner ______ its _______.
sells; assets
A firm temporarily shuts down when it ______ _________, but is ______ in business
stops producing; still
Short-Run Break Even Price
price at which a firm's total revenue equals its total costs (both implicit and explicit)

P = min ATC
A firm will make positive economic profits if P ____ minimum ______
>; ATC
A firm will experience negative economic profit (losses) if P ____ minimum _____
<; ATC
Short-Run Shutdown Price
price that just covers average variable costs

occurs at the intersection of the MC and AVC

graphically: P = minimum AVC
If P < minimum AVC
shutdown is short run -- stop producing
If minimum AVC < P < minimum ATC
produce output so p > 0, but have economic losses
Graph a Break Even Price and Shutdown Price
p 187
Why produce if you are not making a profit?
-may be MORE costly to shutdown
-losses may be temporary
When economic profits are zero, a firm can still have positive ______ profits
accounting
What do you call the short-run supply curve?
marginal cost curve ; MC
Where does the short run supply curve start in a competitive industry?
the MC at and above the intersection with the SRAVC curve

only above the shut down point
Where is the break even point?
When P hits the bottom of the SRATC curve

P = min ATC
Profits and losses act as a ______ for resources to enter an industry or to leave an industry
signal
Signals are compact ways of conveying information to economic _______ makers
decision
An effective signal no only conveys _______ but also provides the ________ to react appropriately
information; incentive
Economic Profits
signal that tells new competitive firms to enter the market
Economic Losses
signal that tells existing firms to exit the market
Firms will respond to ________ opportunities
profit
Markets have a tendency toward the _________
equilibrium
At break-even, resources _______ enter or exit the market
won't
In competitive long run equilibrium, firms will make ______ economic profits
zero
In the long run, firms enter and leave the industry in response to _______ _________
profit opportunities
If Economic Profits in LR are positive:
- new firms will enter
-industry supply will increase (shift right)
-price falls until profits are zero
If Economic Profits in LR are negative:
-existing firms will exit the industry
-Industry supply decreases (shifts left)
-price rises until profits are zero
LR Equilibrium: In the long run, a firm can ______ the scale of its plant, adjusting the plant size in such a way that it has no further _______ to change; it will do so until profits are ________.
change; incentive; maximized
In the long run, a competitive firm produces where P, MR, MC, SR min average cost, and LR min average costs are ________
equal
Graph a firm's LR Production
p 190
Marginal Cost Pricing: a system of pricing in which the price charged is _____ to the _________ to society of producing one more unit of the good or service in question
equal; opportunity cost

P = MC of the last unit you produced
The opportunity cost of production is the _______ to society
MC; marginal cost
Allocative Efficiency
level of output where P = MC
Allocative Efficiency means that marginal value to consumers _____ the marginal ____ of production. We have produced just the _____ amount.
equals; cost; right
Allocative Inefficiency
-wrong amount produced (DWL)
-could mean that P > MC
-often the result of monopoly or externalities
The wrong amount produced can create _____
DWL
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