24.1 Preview of Four Market Structures

• A perfectly competitive market is a market with many sellers and buyers of a homogeneous product and no barriers to entry.

• A price taker is a buyer or seller that takes the market price given.

• The five features of a perfectly competitive market are:

  • There are many sellers.

  • There are many buyers.

  • The product is homogeneous.

  • There are no barriers to market entry.

  • Both buyers and sellers are price takers.

• The firm-specific demand curve is a curve showing the relationship between the price charged by a specific firm and the quantity the form can sell.

• A monopoly is a single firm that serves the entire market.

  • It occurs when the barriers to market entry are very large which can result from very large economies of scale of a government policy that limits the number of firms.

• A monopolist competition is where there are no barriers to entering the market, so there are many firms, and each firm sells a slightly different product.

• An oligopoly ****is a market that consists of just a few forms because economies of scale or government policies limit the number of firms.

24.2 The Firm’s Short-Run Output Decision

• Marginal revenue is the change in total revenue from selling one or more units of output.

• The advantage of the marginal approach is that it is easier to apply.

  • To use the total approach, a firm needs information about the total revenue and total cost for all possible output levels.

  • On the other hand, a firm can apply the marginal principle by increasing its output by one unit and computing the marginal revenue (the cost) and the marginal cost. The firm would produce more output if the price exceeds the marginal cost, or produce less if the opposite is true.

• The break-even price is the price at which economic profit is zero, price equals average total cost.

24.3 The Firm’s Shut Down Decision

• The decision-making rule is:

  • Operate if total revenue is greater than variable cost.

  • Shut down if total revenue is less than variable cost.

• The firm’s shut-down price is the price at which Ethan firm is indifferent between operating and shutting down; equal to the maximum average variable cost.

24.4 Short-Run Supply Curves

• A short-run supply curve is a curve showing the relationship between the market price of a product and the quantity price of output supplied by a firm in the short run.

• If the price drops below the shutdown price, the firm’s total revenue will not be high enough to cover its variable cost, so the firm will shut down and produce no output.

• A short-run market supply curve is a curve showing the relationship between the market price and quantity supplied in the short run.

• If firms are not identical but instead have different individual supply curves, we add the quantity supplied by the hundreds of firms in the market.

24.5 The Long-Run Supply Curve for an Increasing-Cost Industry

• A long-run market supply curve is a curve showing the relationship between the market price and quantity supplied in the long run.

• An increasing-cost industry is an industry in which the average cost of production increases as the total output of the industry increases, the long-run supply curve is politely sloped.

  • The average cost of production increases as the total output increases, for two reasons

    • Increasing the input price, whereas an industry grows, it competes with other industries for limited amounts of various inputs, and this competition drives up the prices of these inputs.

    • Less productive inputs, where a small industry will use only the most productive inputs, but as the industry grows, firms may be forced to use less productive inputs.

24.6 Short-Run and Long-Run Effects of Changes in Demand

• The short-run effect of the increase in demand is that the price increases and the quantity increases.

  • Economic profit is positive, so firms will enter the market.

  • Because of diminishing returns, it is very costly to increase much higher production costs. This causes new firms to enter the market and, as they enter, the price gradually drops to the point at which each firm makes zero economic profit.

• The long-run supply curve is relatively flat because firms enter the industry and build new factories, so there are no diminishing returns to increase production costs.

24.7 Long-Run Supply for a Constant-Cost Industry

• A constant-cost industry is an industry in which the average cost of production is constant; the long-run supply curve is horizontal.

• An example of a constant cost industry, consider the production of birthday cake candles.

  • As the industry grows, it will use more workers, wicks, and wax, but because the industry is such a small part of the markets for labor and materials, the price of these inputs won’t change.

    • As a result, the average cost of production won’t change as the industry grows.

  • The long-run supply curve for a constant-cost industry is horizontal at the constant average cost of production.

  • At any owner price, the quantity of candles supplied would be zero because in the long run, no rational firm would provide candles at a price lower than the average cost of production.

  • At any higher price, firms would enter the candle industry in droves, and entry would continue until the price dropped to the constant average cost of $0.05 per candle.