economics final

chapter 10

Firms in perfectly competitive markets cant constrol the prices of products in the long run because…

1. Firms in these industries sell identical products

2. It is easy for new firms to enter these industries

any given industry has three KEY characteristics

1. number of firms

2. ease of entry

3. examples of industries

economists use to classify into four market structures

1. Perfect competition

2. monopolistic competition

3. oligopoly

4. monopoly

what is a perfectly competitive market

Perfectly competitive market: A market that meets the conditions of

(1) many buyers and sellers,

(2) all firms selling identical products, and

(3) no barriers to new firms entering the market

This is how firms maximize profit it a perfectly competitive market

Profit: Total revenue minus total cost . TC-TR =Profit

Average revenue (AR) is,…

Total revenue divided by the quantity of the product sold.

For any level of output, a firm’s average revenue is always equal to the market price. This equality holds because total revenue equals price times quantity:

TR = P × Q

and average revenue equals total revenue divided by quantity:

AR = TR/Q

So,

AR = TR/Q = (P × Q)/Q = P

:))

Marginal revenue

The change in total revenue from selling one more unit of a product.

profit/Q = P - ATC

(TC divided by Q = ATC)

profit = (price) - total cost

profit = (P - ATC) x Q

This equation tells us that a firm’s total profit is equal to the quantity produced multiplied by the difference between price and average total cost.

what are the three possibilities of whether a firm is breaking even

1. P > ATC, which means the firm makes a profit

2. P = ATC, which means the firm breaks even (its total cost equals its total revenue)

3. P < ATC, which means the firm experiences a loss

A perfectly competitive firm’s ________________ also is its supply curve.

marginal cost curve

(If a firm is experiencing a loss, it will shut down if its total revenue is less than its variable cost. [(PxQ)<AVC]

Shutdown point

The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run

Productive efficiancy

➢ The forces of competition will drive the market price to the minimum average cost of the typical firm.

Productive efficiency: The situation in which a good or service is produced at the lowest possible cost.

Allocative efficiency

A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.

Q!!

why will firms supply goods that provide consumers with marginal benifit (MB) equal to the marginal cost of the last unit

1. The price of a good represents the marginal benefit consumers receive from consuming the last unit of the good sold.

2. Perfectly competitive firms produce up to the point where the price of the good equals the marginal cost of producing the last unit.

3. Therefore, firms produce up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it.