Pure competition - A very large number of firms producing a standardized product; easy market entry/exit
Pure monopoly - 1 firm is sole seller of good/service; no market entry
Monopolistic competition - Relatively large number of sellers producing differentiated products; non-price competition
Oligopoly - Only a few sellers of a standardized or differentiated product; mutual interdependence
Pure competition characteristics
Purely competitive demand
Average revenue - Revenue per unit
Total revenue - Price * corresponding quantity firm can sell
Marginal revenue - Change in total revenue (or the extra revenue) that results from selling one more unit of output
Profit maximization in short run
Economic profit = Total revenue - total cost
Price < Average variable cost → Shutting down more profitable than continuing to produce
Short-run supply curve - Solid segment of marginal cost curve
Higher product prices + marginal revenue → Purely competitive firm will expand output
Wage increase → Shifts supply curve right
Profit maximization in long run
Long-run equilibrium
Long-run supply curve - Effect that changes in number of firms in industry will have on costs of individual firms in industry
Constant cost industry - Industry expansion or contraction will not affect resource prices and therefore production costs
Decreasing cost industries - Industry expands → Firms experience lower costs
Firm will only earn normal profit by producing with MR = MC rule
Productive efficiency - Goods being produced in least costly way
Allocative efficiency - Resources apportioned among firms + industries to yield mix of goods/services most wanted by society
Consumer surplus - Difference between the maximum prices that consumers are willing to pay for a product (as shown by the demand curve) and the market price of that product
Producer surplus - Difference between the minimum prices that producers are willing to accept for a product (as shown by the supply curve) and the market price of the product
Change in consumer tastes, resource supplies, technology → Automatic realignment of resources
Invisible hand - Businesses seek to further self-interest → Unconsciously benefits entire society