perfect competition

economic profit

total rev - total cost

accounting profit

does not include implicit costs like opp cost

normal profit

returns required for the resources of firm

economic profits

an economic rent, a payment above those required to keep factors in operation

managerial theories of firms and reason

assume firms profit max

may rev, sales, growth max due to divorce of ownership

assumptions of perfect comp

-homogenous goods

-price takers

-free entry/exit

-perfect info

shutdown condition in perfect comp

if price falls below minimum of AVC

what is the Sr supply curve of a firm

rising portion of MC curve above min of AVC

sr -> lr in perfect comp

economic profit incentivises new firms to enter market so industry supply curve shifts right

price reaches min point on LAC

No SNP

lr supply curve

constant cost industries: horizontal line at min LAC

rising cost: up sloping

falling cost: down sloping

external eos

-pool of skilled labour

-transport costs

-innovation

-eos in production of inputs

external diseconomies of scale

-increasing labour costs

-increasing cost of inputs

-environmental degradation

-transport congestion

price elasticity of supply

% change in qty supplied that occurs in response to 1% change in price

allocative efficiency

all possible gains from exchange are realised. P=MC

when can a pareto improvement be made

when P dosnt equal MC, someone can be made better without making others worse

producer surplus

monetary amount by which a firm benefits from being in the market

greater than SNP in SR as it only considers variable costs

two tests for perfect comp

1) do all trades take place at same price

2) are firms selling at P=MC (difficult to measure)