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Terms in this set (10)
Perfect Competition Assumption
-There is a very large number of firms,
-Each firm is so small, relative to the size of the industry, that it cannot have a noticeable effect upon the output of
the industry as a whole.
-All firms sell identical (homogeneous) products.
In which there are no barriers to entry or exit (free entry or exit in the market).
-There is perfect/complete information (regarding products, prices, resources, and methods of production).
-individual firms have no control over the market price.
-perfect resource mobility (can easily and without cost shift them from one firm to another).
-The market demand is relatively high, presenting firms with a price that is greater than their ATC
-The firm is maximizing its profits by producing where MR=MC.
-Due to the absence of entry barriers, these profits will not be sustained in the long-run, as new firms will enter the market.
short-run: breaking even
-The market demand and supply have set a price equal to the firm's minimum average total cost.
-The firm is just covering all its costs, meaning it is earning zero economic profits, but no losses
- If the firm produced at any quantity other than Qf, it would earn economic losses. By producing at Qf, it is breaking even.
-There is no incentive for firms to enter or exit this market.
-The market demand is relatively low, so the price the firm can sell its output for is below its average total cost
-The firm is minimizing its losses by producing where MR=MC, because any other output would create a greater loss.
-Due to the absence of entry barriers, these losses will be eliminated in the long-run as firms exit the industry to avoid further losses.
The period of time over which firms can adjust their plant size in response to changes in the level of demand for their product. New firms can enter a market and existing firms can exit a market
Entry and exit in the long-run
In perfectly competitive markets, firms can enter or exit the market in the long-run. And, there is perfect knowledge.
-If economic profits are being earned, firms will be attracted to the profits and will want to enter the market
-If economic losses are being earned, some firms will wish to minimize their losses by shutting down and leaving the market
-Due to the entry and exit of firms in perfectly competitive markets, economic profits and losses will be eliminated in the long-run and firms will only BREAK EVEN.
profit maximization in the long-run
Entry limits profits: When individual firms are earning economic profits in a perfectly competitive market, new firms will be attracted to the market, leading to an increase in market supply and a fall in the price.
The Shut-down Rule
1. A firm facing economic losses has two choices:
Continue to operate your business, and hope that your average revenue (price) is at least high enough to
cover your average variable costs (these are your operating costs in the short-run... you have to earn enough to pay your workers at least!), OR...
2. Shut down and give up your fixed costs, which are those that must be paid EVEN if you shut your business down. A firm's loss when it shuts down is its total fixed costs, those payments to owners of capital and land resources (rent for your landlord, interest owed to the bank on money you borrowed to buy capital).
Both productive and allocative efficient
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