The Profit-Maximizing Competitive Firm and Market Supply

Vocabulary-style flashcards covering the characteristics of perfectly competitive firms, short-run and long-run behaviors, and economic efficiency concepts from Lecture 8.

Profit

$$\text{Total revenue} - \text{Total cost}$$

Implicit costs

The imputed cost of non-purchased inputs, such as labor supplied by an owner-operator or the opportunity cost of the owner’s capital.

Normal profit

Occurs when economic profit equals $0$, meaning accounting profit covers the owner’s cost of non-purchased inputs.

Marginal cost (MC)

The additional cost of producing one more unit of output.

Marginal revenue (MR)

The additional revenue earned from selling one more unit of output.

Profit Maximization Rule

The point where marginal revenue equals marginal cost ($MR = MC$).

Price taker

A firm that considers the market price of output as given and outside of its control, facing a perfectly elastic demand curve.

Shut down point

The minimum point on the average variable cost ($AVC$) curve; if price falls below this, the firm will stop production as it cannot recover variable costs.

Firm’s Short Run Supply Curve

The portion of the firm's marginal cost ($MC$) curve that lies above the minimum average variable cost ($AVC$).

Short Run Market Supply Curve

The horizontal summation of the marginal cost ($MC$) curves of all firms within a specific industry.

Long-Run Competitive Equilibrium

An industry state where no firms tend to enter or exit because economic profit is zero, occurring where $P = \text{minimum LRAC}$.

Consumer surplus (CS)

The difference between what a consumer is willing to pay and the actual price paid ($\text{WTP} - \text{Price}$), represented as the area below the demand curve and above the price.

Producer surplus (PS)

The difference between the price received and the marginal cost ($MC$) of producing each unit, represented as the area above the supply curve and below the price.

Social surplus

The sum of consumer surplus ($CS$) and producer surplus ($PS$); it is the primary criterion for measuring market efficiency.

Invisible hand

Adam Smith's concept that individuals pursuing their own gain are led to promote the public interest, resulting in an output level that maximizes social surplus.