ch 6 perfectly competitive supply

principle of increasing opportunity cost

cost of producing an additional unit of a good increases as the production of that good increases

profit

total revenue - total cost

*total cost includes explicit and implicit costs

(P - ATC) x Q

standardized products

• identical goods offered by many sellers

• no loyalty to your supplier

many buyers and sellers

• each has small market share

• no buyer or seller can influence price

  • price takers

mobile resources

• inputs move to their highest value use

• firms enter and leave industries

informed buyers and sellers

• buyers know market prices

• sellers know all opportunities and technologies

market supply and demand

these set the price for each product

market price

a perfectly competitive firm can sell all it wants at the _______

imperfectly competitive firms

• have some control over price

  • some similarities to perfectly competitive firms

perfectly elastic

an individual firm’s demand curve is _____ if the firm operates in perfect competition

production

converts inputs into outputs

technology

recipe for production

factor of production

input used in the production of a good or a service (ex: land, labor, capital, and entrepreneurship

short run

period of time when at least one of the firm’s factors of production is fixed

long run

period of time in which all inputs are variable

variable factors

can be changed in the short run

fixed factor

cannot be changed in the short run

law of diminishing returns

when some factors of production are fixed, increased production of the good eventually requires even larger increases in the variable factor

low levels of production

the law of diminishing returns may not hold at ______

fixed cost

sum of all payments for fixed inputs

often referred to as the capital cost

variable cost

sum of all payments for variable inputs

the total labor cost and other variable inputs

total cost

sum of all payments for all inputs

fixed cost + variable cost

marginal cost

change in total cost / the change in output

increase output

if marginal benefit is at least as great as the marginal cost

decrease output

if marginal benefit is greater than marginal cost

market price = marginal cost

competitive firm produces where ______

continue to operate

if losses are less than if you shut down

if firm’s revenue is at least as much as the variable cost for the quantity where P = MC

shut down

if losses are less than if you continue operating

if revenue is less than variable cost

all fixed costs

if the firm shuts down in the short run, it loses ______

most a firm can lose

average variable cost (AVC)

VC / Q

shut down if price is less than this

average total cost (ATC)

TC / Q

firm is profitable if price is greater than this

greater

a firm is profitable if total revenue is ______ than its total cost

(P - ATC)

profit per unit of output

positive

short-run marginal cost curves have a _____ slope

long-run supply curves

flat, upward sloping, or downward sloping

technology

more output, fewer resources

input prices

decreases costs

number of suppliers

more suppliers in the market

expectations

lower prices in the future

price of other products

lower prices for alternative products