Chapter 10: Pure Competition Flashcards
(40 cards)
what does Market Structure refer to?
Market structure refers to the characteristics of an industry that define the likely behavior and performance of its firms.
What is Imperfect Competition?
imperfect competition refers to all market structures except pure competition.
What are the Characteristics of Pure Competition?
-Very large numbers of sellers
-Standardized product: a product for which all other products in the market are identical and thus are perfect substitutes. The consequence of this is that buyers are indifferent as to whom they buy from
-“Price takers”: sellers that have no pricing power; in other words, they do not have the ability to price their product.
-Free entry and exit
What does it mean when a firm has a Purely Competitive Demand?
Perfectly elastic demand:
-Firm produces as much or little as they wish at the market price.
Demand graphs as horizontal line at the price.
What do a Purely Competitive Firm’s Demand and Revenue Curve look like?
This graph shows a purely competitive firm’s demand curve and revenue curves. The demand curve (D) of a purely competitive firm is a horizontal line (perfectly elastic) because the firm can sell as much output as it wants at the market price (here, $131). Because each additional unit sold increases total revenue by the amount of the price, the firm’s total-revenue (TR) curve is a straight upsloping line, and its marginal-revenue (MR) curve coincides with the firm’s demand curve. The average-revenue (AR) curve also coincides with the demand curve.
What is Average Revenue (AR) and it’s the formula?
Revenue per unit
AR = TR/Q = P
What is Total Revenue (TR) and what is the formula for it?
Total Revenue refers to the total amount of money that the firm collects for the sale of all of the units of their good.
TR = P × Q
What is Marginal Revenue and its formula?
Marginal revenue reflects the additional revenue that the firm will receive by producing one more unit of output.
MR = ΔTR/ΔQ
In Pure Competition what are equal?
Marginal Revenue (MR) and Price (P)
What is Profit Maximization:
When the purely competitive firm attempts to maximize its economic profit (or minimize its economic loss) by adjusting its output.
What is the Break -Even Point?
The break-even point is an output at which a firm just makes a normal profit, Total Revenue (TR) = Total Costs (TC).
What does Profit Maximization in the Short Run tell us based on the TR - TC Approach, and when will a firm maximize profits and continue to produce?
The firm’s profit is maximized when total revenue, TR, exceeds the total cost, TC, by the maximum amount. That amount will be the Maximum Econmoic Proft at the # of units produced. The vertical distance between TR and TC is plotted as a total economic profit curve.
What does Profit Maximization in the Short Run tell us based on the MR=MC Approach?
The MR = MC rule is the principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
In Profit Maximization for Pure Competiton ONLY, the MR=MC approach can also be stated as what? Why?
P=MC
Because the demand schedule faced by a competitive seller is perfectly elastic at the going market price, product price and marginal revenue are equal. So, under pure competition (and only under pure competition), we may substitute P for MR in the rule: When producing is preferable to shutting down, the competitive firm should produce at the point where price equals. (pg 202)
What are the 3 questions a firm must answer in regard to Profit Maximization in the Short Run?
- whether or not the firm should produce at all in the short run. In the short run, the firm should shut down under certain circumstances.
- If it has been determined that the firm should produce in the short run, then the firm must determine how much to produce.
- Lastly, based on the answers to the first two questions, it is necessary to calculate the profit or loss for the firm. We recognize that part of the profit-maximization rule is producing an output that minimizes losses in the short run when that is the best option.
When does a firm shut down in the Short Run based on the MR=MC approach
If marginal revenue does not equal or exceed average variable cost, the firm will shut down rather than produce.
What is Profit Maximization Output in the TR- TC approach?
It is every unit of output up to and including the unit representative of the total revenue, TR, exceeding the total cost, TC, by the maximum amount. The unit after the Profit Maximzation output, however, should not be produced. It would add more to cost ($150) than to revenue ($131). So 9 units is the profit-maximizing output. (Pg 203)
What is Profit Maximization Output in the MR=MC approach?
Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, up to where MR = MC. Since the tenth unit’s MC > MR, 9 units is the profit maximizing output.
What is the formula for Total Economic Proft?
Profit Maximization Output # * (P-ATC)
What is Loss-Minimizing Case?
If price, P, exceeds the minimum AVC but is less than ATC at the MR = MC output, what will happen to the firm, will they continue to produce or shutdown?
then the firm will incur losses, but it will produce.
If price P falls below the minimum AVC what should the competitive firm do?
It will minimize its losses in the short run by shutting down.
why does a competitive firm continue to produce instead of shutting down?
the loss from producing is smaller than the loss if the firm shutdowns, so this is the firm’s best choice.
When comparing MC and MR at each level of output. The firm should continue to expand output as long as what?
MR (in other words P) is greater than MC.
