Chapter 8

microeconomics supply in a competitive market

Market structure

the type of market a firm competes within

Main market characteristics

number of firms, barriers to entry, and whether the consumer cares which company produced the good

Marginal revenue

the additional revenue a firm earns from selling another unit

How much should a firm produce?

an amount where marginal cost equals price and marginal revenue

If marginal cost is less than price?

the firm should increase production

 If marginal cost is greater than price?

the firm should decrease production

If price is greater than AVC?

the firm earns a profit

If price equals AVC?

the firm earns zero profit

If price is less than AVC?

the firm has a loss

When should a firm shut down or continue in the short run?

When price is greater than or equal to AVC it should continue and if its less than AVC, it should shut down

What happens to the operations of a firm with negative profit?

If it can cover its VC, it can operate

Short-run supply curve

the quantity a firm will supply at any market price

Market supply

 found by horizontally adding together the supply curves of all firms in the market

Positive economic profit

when new firms enter the market, increase supply, and lower the market price

Economic losses

when firms leave the market, decrease supply, and raise the market price

Zero economic profit

when firms make just enough to cover all costs and stay in business

Constant-cost industry

average costs stay the same as the industry grows (long-run supply curve is horizontal)

Increasing-cost industry

average costs rise as the industry grows (long-run supply curve is upward-sloping)

Decreasing-cost industry

average costs fall as the industry grows (long-run supply curve is downward-sloping)

Economic rent

the extra income earned by a person or firm because they control an asset, skill, or legal right that is naturally scarce

Economic rent formula

actual payment received - opportunity cost

What are the three conditions of a long run competitive market equilibrium?

P = MC, P = ATC, and firms earn zero profit (there is no incentive to enter or exit the market)

What does P = MC mean?

That the firm has captured all available profit. Producing any more or less would lower profit.

What does P = AVC?

That a firm has covered all of its costs in the long run