Chapter 12 Flashcards
Perfect competition
A market in which:
- Many firms sell identical products to many buyers.
- There are no restrictions on entry into the market.
- Established firms have no advantage over new ones.
- Sellers and buyers are well informed about prices.
How does perfect competition arise?
If the minimum efficient scale of a single producer is small relative to the market demand for the good or service.
Minimum efficient scale
The smallest output at which long-run average cost reaches its lowest level.
Characteristics of goods in perfect competition
- They have no unique characteristics.
- Consumers don’t care which firm’s product they buy
Are firms in perfect competition price setters or takers?
Price takers
Price taker
A firm that cannot influence the market price because its production is an insignificant part of the total market.
Economic profit
Total revenue minus total cost (including the opportunity cost of production)
Total revenue
The price of a firms output multiplied by the number of units sold.
(price x quantity)
Marginal revenue
The change in total revenue that results from a one-unit increase in the quantity sold.
Marginal revenue calculation
∆ Total revenue / ∆ Quantity sold
Total Economic loss equation
Economic loss = TFC + (AVC - P) x Q
Where TFC = Total fixed cost
AVC = Average variable cost
P = Price
Q = Quantity
If a firm shuts down, it’s economic loss is equal to…
it’s total fixed cost
When does a firm shut down (rationally)
when average variable cost exceeds price
Shutdown point
The price and quantity at which a firm is indifferent between producing and shutting down.
Short-run market supply curve
Shows the quantity supplied by all the firms in the market at each price when each fim’s plant and the number of firms reamin the same.
