chapter 7 (perfect competition and the supply curve)

Price-taking producer

a producer whose actions have no effect on the market price of a good or service it sells.

price-taking consumer

a consumer whose actions have no effect on the market price of a good or service that consumer buys.

perfectly competitive market

market in which all participants are price takers — neither consumption nor production decisions of an individual consumer have an effect on the market price of a good.

perfectly competitive industry

industry in which producers are price takers.

Two necessary conditions for perfect competition

1. must contain many producers, none of whom have a large market share.

2. only if consumers regard the products of all producers as equivalent.

Market share

the fraction of the total industry output accounted for by that producers output.

standardized product

a good — also known as a commodity when consumers regard the products of different producers as the same good.

free entry and exit

when new producers can easily enter into an industry and existing producers can easily leave that industry.

Marginal revenue

the change in total revenue generated by an additional unit of output

optimal output rule

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

Profit maximizing output

the market price is equal to the marginal cost.

Marginal revenue curve

shows how marginal revenue varies out output level varies.

Price-taking firms optimal output rule

profit is maximized by producing the quantity of output at which the market price is equal to the marginal cost of the last unit produced.

When is production profitable?

a firm produces quantity at which TR > TC — profitable

a firm produces quantity at which TR=TC — firm breaks even

a firm produces quantity at which TR < TC — firm incurs a loss.

The break even price

market price at which the firm earns zero profit

When is producer profitable?

• whenever the market price exceeds the minimum average total cost, the producer is profitable.

• whenever the market price equals the minimum average total cost, the producer breaks even.

• whenever the market price is less than the minimum average total cost, the producer is unprofitable.

When will a firm cease production in the short run?

when the market price falls below the shut-down price which is equal to minimum average variable cost.

Cases to consider in the short run

• when the market price is below minimum average variable cost

• when the market price is greater than or equal to minimum average variable cost.

short run indivdual supply curve

shows how an individual producers profit maximizing output quantity depdends on the market price, taking fixed costs as given

industry supply curve

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

short-run industry supply curve

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

short-run market equilibrium

when the quantity supplied equals the quantity demanded, taking the number of producers as given

long-run market equilibrium

when the quantity supplied equals the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur.

long run industry supply curve

shows how the quantity supplied responds to price once producers have had time to enter or exit the industry.

The cost of production and efficiency in long-run equilibrium

1. in a perfectly competitive industry in equilibrium, the value of marginal cost is the same for all firms

2. in a perfectly competitive industry with free entry and exit, each firm will have zero economic profit in long run equilibrium.

3. The long run market equilibrium of a perfectly competitive industry is efficient: no mutually beneficial transactions go unexploited.