Intro to Microeconomics Chapter 6 (PERFECTLY COMPETITIVE SUPPLY)

To generate the market supply curve (C) from the individual the individual supply curves (A) and (B),..

we add the individual supply curves horizontally. (multiply each quantity value on the individual supply curve by x number of identical sellers)

If all individuals gave identical upward-sloping supply curves,..

the market supply curve will be upward-sloping as well.

The upward slope of the supply curve reflects the fact that costs tend to rise at the margin when producers expand production, partly because..

each individual exploits her most attractive opportunities first, but also because different potential sellers face different opportunity costs.

Profit

the total revenue a firm receives from the sale of its product minus all costs - explicit and implicit - incurred in producing it

Profit-maximizing firm

a firm whose primary goal is to maximize the difference between its total revenues and total costs

Perfectly competitive market

a market in which no individual supplier has significant influence on the market price of the product

Price taker

a firm that has no influence over the price at which it sells its product

The 4 characteristics of markets that are perfectly competitive

1. All firms sell the same standardized product (buyers are willing to switch from one seller to another if they can obtain a lower price)

2. The market has many buyers and sellers, each of which buys or sells only a small fraction of the total quantity exchanged (individual buyers and sellers will be price takers and the market price is a fixed number beyond their control)

3. Productive resources are mobile (if a seller identifies a profitable business opportunity, they will enter that market all means necessary and vice versa)

4. Buyers and sellers are well informed (buyers and sellers are aware of the relevant opportunities available to them)

From the perspective of an individual firm in a perfectly competitive market, what does the demand curve for its product look like?

Since it can sell as much or as little as it wishes at the prevailing market price, the demand curve for its product is perfectly elastic at the market price

Imperfectly competitive firm (or price setter)

a firm that has at least some control over the market price of its product

Factor of production

an input used in the production of a good or service

Short run

a period of time sufficiently short that at least some of the firm’s factors of production are fixed

Long run

a period of time of sufficient length that all the firm’s factors of production are variable

Law of diminishing returns

a property of the relationship between the amount of a good or service produced and the amount of a variable factor required to produce it; the law says that when some factors of production are fixed, increased production of the good eventually requires ever-larger increases in the variable factor (when some factors of production are held fixed, increased production of the good eventually requires ever-larger increases in the variable factor)

Fixed factor of production

an input whose quantity cannot be altered in the short run

Variable factor of production

an input whose quantity can be altered in the short run

Typically, returns from additional units of the variable input eventually..

diminish because of some form of congestion.

Fixed cost

the sum of all payments made to the firm’s fixed factors of production

Variable cost

the sum of all payments made to the firm’s variable factors of production

Total cost

the sum of all payments made to the firm’s fixed and variable factors of production

Marginal Cost

the increase in total cost that results from carrying out one additional unit of an activity