perfect competition

what are the characteristics of perfect competition?

• there are many producers, each with a small market share 

• Consumers regard the products of all producers as equivalent 

• both sellers and buyers are price takers

• free entry and exit 

definition of market share?

the fraction of the total industry output accounted for by that producer’s output.

definition of standardised products?

the products are different only if the consumers believe them to be

if consumers think they are similar, then they are

Total revenue formula?

P X Q

Profit formula?

TR - TC

what is the optimal amount for profit maximising? 

MB = MC

what happens because the firm is a price-taker? 

MR = price 

why is profit maximised where MR = MC? 

each time the firm produces another unit, there are extra costs and extra revenues.

If producing another unit adds more to revenue that its costs profit will increase

what happens when MR > MC?

add more profit

what happens when MR < MC?

less profit

what does firm face because they are price takers?

horizontal perfectly elastic demand curve that is equivalent to its marginal revenue curve

definition of optimal output rule?

profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost

what if marginal revenue and marginal cost aren’t exactly equal at any level of quantity?

you produce the largest quantity for which marginal revenue exceeds marginal cost.

what is the break even formula for total revenue?

TR = TC

what is the break even formula for average total cost?

P = ATC

what is break-even?

when the firm is at a price which it earns zero profit

when does a firm not shut-down in the SR?

if fixed costs can be payed

when the market price is below minimum average variable costs what should a firm do?

• cease production immediately

what should the firm do if the price is greater than the minimum average variable cost? 

should produce in the SR

when does the firm stop producing in the SR?

if the market price falls below the shut-down price (minimum AVC)

is the SR where does every firm produce at?

produce at every price above minimum ATC where price intersects the MC curve 

how can a firm change its fixed costs?

• Buying or selling equipment

what does the industry supply curve show?

the relationship between the price of a good and the total output of the industry as a whole

what does the SR industry supply curve show? 

shows how the quantity supplied by an industry depends on the market price given a fixed number of producers

what is the SR market equilibrium?

when the quantity supplied equals the quantity demanded, taking the number of

producers as given.

when will new firms enter in the LR?

when there is economic profit

P > min ATC

what happens if firms are making a loss?

then there will be exits, pushing the supply curve to the left and increasing the price. This will happen until price reaches the break-even price (minimum of the ATC).

Why would a firm want to enter an industry if the market price is only slightly greater than the break-even price?

so if the market price is above the break-even level (no matter how slightly), the

firm can earn more in this industry than it could elsewhere.

why is the LR supply curve flatter than the SR supply curve? 

•  A higher price attracts new entrants in the long run, raising industry

output and lowering price.

• A fall in price induces existing producers to exit in the long run, reducing industry output and raising price.

In the SR, when the price increases why does the quantity increase?

because the existing individual firms increase their production so that P=MC

In the LR, who adjusts the quantity?

individual firms

new firms will enter

increasing the production

in the LR what elasticity Is the supply curve?

it is perfectly elastic if costs are constant across the industry - if each firm, be it an incumbent or a new entrant, faces the same cost structure 

why in the long-run industry does the supply curve slopes upwards?

when producers use an input that is in limited supply. As the industry expands, the price of that input goes up, and later entrants have a higher cost structure than early entrants.

why does industry supply curves slope downwards?

when an industry faces increasing returns to scale, in which average costs fall as output rises

is the long-run price elasticity of supply is higher than the short-run price elasticity whenever there is free entry and exit?

yes