Chapter 6 - Perfectly competitive supply
Profit-maximizing firms in perfectly competitive markets
- Profit: total revenue a firm receives from the sale of its product minus all costs - explicit and implicit - incurred in producing it.
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- Profit-maximizing firm: firm whose primary goal is to maximize the difference between its total revenues and total costs.
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- Perfectly competitive market: market in which no individual supplier has significant influence on the market price of the product.
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- Price taker: firm that has no influence over the price at which it sells its product.
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- Characteristics of markets that are perfectly competitive: * All firms sell the same standardized product. * The market has many buyers and sellers, each of which buys or sells only a small a fraction of the total quantity exchanged. * Productive resources are mobile. * Buyers and sellers are well informed. * That means they are aware of the relevant opportunities available to them.
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- Imperfectly competitive firm: firm that has at least some control over the market price of its product.
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- Factor of production: input used in the production of a good/service.
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- Short run: period of time sufficiently short that at least some of the firm's factors of production are fixed.
- Long run: period of time of sufficient length that all the firm's factors of production are variable.
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- Law of diminishing returns: property of the relationship between the amount of a good/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 in creases in the variable factor.
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- Fixed factor of production: input whose quantity cannot be altered in the short run.
- Variable factor of production: input whose quantity can be altered in the short run.
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- Fixed cost: sum of all payments made to the firm's fixed factors of production.
- Variable cost: sum of all payments made to the firm's variable factors of production.
- Total cost: sum of all payments made to the firm's fixed and variable factors of production.
- Marginal cost: as output changes from one level to another, the change in total cost divided by the corresponding change in output.
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- Profit = Total revenue - Total cost
- Profit = Total revenue - Variable cost - Fixed cost
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- Average variable cost (AVC): variable cost divided by total output.
- Average total cost (ATC): total cost divided by total output.
- Profitable firm: firm whose total revenue exceeds its total cost.
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Determinants of supply revisited
- Among the relevant factors causing supply curves to shift are: * New technologies * Changes in input prices * Changes in the number of sellers * Expectations of future price changes * Changes in the prices of other products that firms might produce
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Supply and producer surplus
- Producer surplus: amount by which price exceeds the seller's reservation price.
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