ECN-102-01: CH 23 Perfect Competition

perfect competition

a market structure in which the decisions of individual buyers and sellers have no effect on market price

perfectly competitive firm

a firm that is such a small part of the total industry that it cannot affect the price of the product or service it sells

price taker

a perfectly competitive firm that must take the price of its product as given because the firm cannot influence its price

total revenues

the price per unit times the total quantity sold; the same as total receipts from the sale of output

profit-maximizing rate of production

the rate of production that maximizes total profits, or the difference between total revenues and total costs; also, the rate of production at which marginal revenue equals marginal cost

marginal revenue

the change in total revenues divided by the change in output

marginal cost

the change in total cost divided by the change in output

short-run break-even price

the price at which a form’s total revenues equal its total costs; at the break-even price, the firm is just making a normal rate of return on its capital investment (It’s covering its explicit and implicit costs)

short-run shutdown price

the price that covers average variable costs; it occurs just below the intersection of the marginal cost curve and the average variable cost curve

industry supply curve

the set of points showing the minimum prices at which given quantities will be forthcoming; also called the market supply curve

signals

compact ways of conveying to economic decision markers information needed to make decisions; an effective signal not only conveys information but also provides an incentive to react appropriately

economic profits

signal resources to enter the market

economic losses

signal resources to exit the market

long-run industry supply curve

a market curve showing the relationship between prices and quantities after firms have been allowed time to enter or exit from an industry, depending on whether there have been positive or negative economic profits

constant-cost industry

an industry whose total output can be increased in the long run without an increase in input prices; its long-run supply curve is horizontal

increasing-const industry

an industry in which a long-run increase in industry output is accompanied by an increase in input prices; its long-run industry supply curve slopes upward

decreasing-cost industry

an industry in which an increase in industry output leads to a reduction in input prices; its long-run industry supply curve slopes downward

marginal cost pricing

a system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question; the opportunity cost is the marginal cost to society

market failure

a situation in which unrestrained market operation leads to either too few or too many resources going to a specific economic activity