Chapter 10 Pure Competition

What’re the four market models?

1. Pure competition

2. Pure Monopoly

3. Monopolistic Competition

4. Oligopoly

What’re the characteristics of the pure competitive market?

1. Large number of sellers

2. Standardized products (all other products in market are identical, many substitutes available)

3. No control over prices (individuals are price takers-they have to accept whatever price is being given.)

4. No obstacles preventing entry into market

5. No nonprice competition (no product differentiation from substitutes using things like design)

i.e: food products like rice, grain, dairy which cn be produced by anybody

What’re the characteristics of the monopolistic competitive market?

1. Many firms

2. Differentiated products

3. Some control over price but the limits are narrow

4. Relatively easy entry into the market

5. Considerable emphasis on advertising, trademarking, brand names (nonprice competition)

i.e: restaurants, gyms, gas stations, retail trade, etc.

What’re the characteristics of an oligopoly market?

1. Few number of firms

2. Standardized or differentiated products

3. Control of price is limited

4. Significant obstacles to enter the market

5. Lots of nonprice competition particularly with product differentiation

i.e: airlines, automobiles, wireless service providers, etc.

What’re the characteristics of the pure monopoly market?

1. One firm

2. Unique product being produced with no close substitutes

3. Consider control over the price

4. No one else can enter the particular market

5. Mostly PR advertising and market

i.e: patenteded pharmaceuticals

How does perfectly elastic demand relate to pure competition?

1. Firms produce as much or as little as they wish at the market price

2. Demand will graph as a horizontal line

What’re the revenue formulas?

1. Average Revenue: Revenue Per Unit

   • AR= TR/Q = P

2. Total Revenue

   • Q (P)

3. Marginal Revenue

   • Change in Total Revenue / Change in Quantity

What’s profit maximization using the total revenue minus total cost approach?

The competitive producer will wish to produce at the output level where total revenue exceeds total cost by the greatest amount.

Firms produce where the difference between total revenue and total cost is the greatest.

What’s profit maximization using the Marginal revenue equals marginal cost rule?

A firm will maximize its profit or minimize its losses by producing the output at which marginal revenue and marginal cost are equal

The maximizing output quantity is the last amount where marginal revenue is greater than marginal cost.

Whats the economic profit formula?

Price - ATC (Quantity of output)

what are the conditions at which firms continue to expand output?

As long as marginal revenue is greater than marginal cost

Output Determination

1. Should this firm produce?

   • Yes, if price is equal to or greater than minimum average variable cost. This means that the firm is profitable or that its losses are less than its fixed cost

2. What quantity should this firm produce?

   • Produce where MR (=P)=MC; there profit is maximized or loss is minimized

3. Will production result in economic profit?

   • Yes, if price exceeds average total cost. No if average total cost exceeds price.

What’re characteristics of the long run in pure competition?

1. Firms can enter or exit the industry

2. Firms can expand or contract capacity

*decisions are made on the incentives of profits or losses*

Whats the constant cost industry?

It’s when the entry and exit of firms does not affect resource prices.

As it pertains to the long run equilibrium how does entry and exit of a market impact profits and losses?

1. Entry eliminates profits

   • firms enter, supply increases, price falls b/c of surplus

2. Exit eliminates losses

   • firms exit, supply decreases, price rises due to shortage

Whats the long run adjustment process in pure competition?

1. Firms seek profits and shun losses

2. Firms are free to enter or to exit a market

3. Production will occur at firms minimum average total cost

4. Price will equal minimum average total cost

What’re the characteristics of the constant cost industry?

1. Entry or exit doesn’t affect long run ATC

2. Constant resource prices

3. Special case?

What’re the characteristics of the increasing cost industry?

1. Most industries are apart of the increasing cost industry

2. Long run ATC increases with expansion

3. Specialized resources

What’s productive efficiency?

Producing goods in the least costly way

• Producing where P= Minimum ATC

What’s allocative efficiency?

Producing the mix of goods most desired by society

• Producing where P=MC

• Triple equality: P=MC=Minimum ATC

What does a purely competitive market automatically adjust to?

1. Changes in consumer tastes

2. Resource supplies

3. Technology

What’s creative destruction?

The creation of new products and new production methods destroys the market positions of firms committed to existing products and old ways of doing business

Whats the formula for breaking even?

TR=TC

How do you know that you have a economic profit when graphing?

When the price is greater than the ATC and AVC curves

What does it mean when price is greater than the AVC curve and less than the ATC curve?

A firm will incur losses but it’ll still produce

loss = p-ATC(6)

What does it mean when price is less than the AVC and ATC curve?

A firm will minimize its its losses by shutting down

What happens when MC< ATC?

ATC falls

What happens when MC> ATC

ATC Rises