Term
| three basic asumption for a perfectly competitive market |
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Definition
1. price taking
2. product homogeneity
3. free entry and exit |
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Term
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Definition
frim that has no influence over market price and thus takes the price as given.
- i.e. it takes the price as a given
- makes demand curve for a firm horizontal
(applies to consumers as well -- individual consumers have no impact on the market) |
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Term
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Definition
when there are no special costs that make it difficult for a firm to enter (or exit) industry
common obstacles:
- patents
- license fees
- immense investment costs (airlines)
- price collusion among existing firms |
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Term
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Definition
difference between total revenue and total cost
∏(q) = R(q) - C(q) |
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Term
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Definition
| change in revenue resulting from a one unit increase in output |
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Term
| demand curve in a competitive market |
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Definition
- horizontal
demand curve facing an individual firm in a competitive market is both its average revenue curve and its marginal revenue curve. Along this demand curve, marginal revenue, average revenue,and price are all equal.
*perfectly elastic (and thus horizontal), even though market demand curve is downward sloping.
this is because... a firm is choosing its output on the assumption that price will be unaffected by its choice. |
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Term
| profit maximization by a competitive firm |
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Definition
a perfectly competitive firm should choose its output so that marginal costs equals price (MC(q) = MR = P)
*since firms take price as fixed, this is a rule for setting output, not price |
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Term
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Definition
if a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost.
(true whether in competitive or non-competitive market) |
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Term
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Definition
| the firm should shut down if the price of the product is less than the average economic cost of production at the profit-maximizing output. |
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Term
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Definition
| sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production. |
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Term
| long run profit maximization |
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Definition
| the long-run output of a profit-maximizing competitive firm is the point at which long-run marginal cost equals the price. |
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Term
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Definition
| a firm earning a normal return on its investment - i.e. it is doing as well as it could by investing its money elsewhere. |
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Term
| long-run competitive equilibrium |
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Definition
| all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded. |
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Term
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Definition
| amount that firms are willing to pay for an input less the minimum amount necessary to obtain it. |
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Term
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Definition
| describes the minimum cost at which a firm can produce various amounts of input |
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Term
| perfectly competitive markets, summarized |
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Definition
where all firms produce an identical product (product homogeneity), and each firm is so small in relation to the industry that its production decisions have no effect on market price (price takers).
new firms can enter the industry if the see potential for profit and leave if they start losing money. |
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Term
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Definition
| shows how a firms supply curve changes as cost of production or the prices of inputs change. |
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Term
| in the short run, firms will... |
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Definition
| choose output levels in order to maximize profit. |
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Term
| in the long run, firms will... |
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Definition
| not only make output choices, but decide whether to be in a market at all. |
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Term
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Definition
when products of all the firms in a market are perfectly substitutable with one another
- referred to as "commodities"
- ensures there is a single market price |
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Term
| in *highly* (not perfectly) competitive markets... |
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Definition
| firms face highly elastic demand curves and relatively easy entry and exit. |
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Term
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Definition
revenue = (Price)(quantity sold)
R = Pq |
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Term
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Definition
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Term
| slope of the total revenue curve |
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Definition
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Term
| slope of the total cost curve |
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Definition
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Term
| total cost is positive even when output is zero because... |
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Definition
| there are still fixed costs in the short run. |
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Term
| q* on a short-run profit maximization graph |
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Definition
- where profit (i.e. distance between R and C) is greatest.
- where MRq = MCq (the slopes of each curve)
- i.e. where ∆π/∆q = 0 |
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Term
| short-run profit maximization, restated |
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Definition
is maximized at point at which an additional increment to output leaves profit unchanged
- i.e. where ∆π/∆q = 0 |
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Term
| since capital is fixed in short-run... |
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Definition
| firms operate with fixed amounts of capital and must choose the levels of its *variable* inputs (labor and materials) to maximize profit |
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Term
| Accounting Profit vs. Economic Profit |
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Definition
Accounting: normal
Economic: includes opportunity costs (economists view costs in terms of opportunity costs.)
- explicit opportunity costs: (explicit payments -- food, labor rent, etc.)
- implicit opportunity costs: (wages you're not earning elsewhere) |
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