Chapter 14: Firms in competitive markets Flashcards by Alexandre Kutner

What are the three characteristics of a competitive market?

1) There are man buyers and sellers in the market
2) The goods offered by the various sellers are identical
3) firms can freely enter or exit the market

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In a competitive market, the actions of a single buyer or seller have a — impact on the market price.

negligible

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In competitive markets, buyers and sellers are price —

takers

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What is average revenue?

Total revenue divided by quantity sold

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What is the formula for average revenue?

PQ/Q

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For all firmsaverage revenue equals***

the price of the good

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What is marginal revenue?

The change in total revenue from an additional unit sold.

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For competitive firms, marginal revenue equals–

the price of the good

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A perfectly competitive firm takes its price—

as given by market conditions

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When a perfectly competitive firm increases the quantity it produces and sells by 10 percent, its marginal revenue —- and its total revenue rises by —-

stays the same; rises by exactly 10 percent

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Why is the price line horizontal for a competitive firm?

Firms are price takers

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For a competitive firm, price equals both

average revenue and marginal revenue

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If a firm is producing at a marginal cost below the price, is the firm making a profit? What should it do?

It is making a profit, but can increase its profits by producing more.(profit if marginal revenue > marginal cost)

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If a firm is producing at a marginal cost above the price, is the firm making a profit? What should it do?

It is not making an optimal profit. The firm could increase its profits by producing less. (If the marginal cost is greater than the marginal revenue, each additional unit produced decreases the profit.

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What are the three general rules for profit maximization?

1) If marginal revenue is greater than marginal cost, the firm should increase its output
2) if marginal cost is greater than marginal revenue, a firm should decrease its output
3) at the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal

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If marginal revenue is ___ than marginal cost, the firm should increase its output.

greater

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If marginal revenue is ___ than marginal cost, the firm should decrease its output.

less

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For any given price, the competitive firm’s profit maximizing quantity of output is found by

locating the intersection of the marginal cost curve with the price

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What happens to the maximum profit point when the price of a good increases?

Marginal revenue (price) increases and therefore so does the point of intersection with the marginal cost curve. There is room to increase the supply of goods.

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In most cases, the marginal cost curve of a competitive firm is equivalent to its

supply curve

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a competitive firm’s supply curve is showed by the —

marginal cost

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What does a firm shutting down refer to?

A short-run decision not to produce anything during a specific period of time because of current market conditions.

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What does a firm exit refer to?

A long-run decision to leave the market.

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A firm that shuts down must still pay

its fixed costs

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A firm that exits the market pays what costs?

none, fixed or variable.

If a farmer decides not to grow any crops, but he wants to keep his farm, he is paying the cost of land as as a...

fixed cost

A firm shuts down if...

the revenue that it would earn from producing a good (price) is less than its variable costs of production.

What is the formula for a firm shutting down?

What is the formula, in terms of price, for a firm shutting down?

If P < AVC (If Tr/q < VC/q)

If a firm slightly overproduces relative to the price and incurs some lost productivity does it have to shutdown?

No, because even if it incurs some losses, most of the goods still have marginal revenue greater than marginal cost, which means the average variable cost is the same.

The minimum point on the average-variable-cost curve is sometimes referred to as the---- price

shutdown, or start-up price.

A firm shuts down lower than its minimum AVC point because

the profit cannot cover the variable costs of producing a unit of the good.

The competitive firm's short-run supply curve is---

the portion of its marginal-cost curve that lies above the average variable cost.

If a firm produces anything, it produces the quantity at which .... equals the good's price, which the firm takes as ...... Yet, if the price is less than average variable cost at that quantity, the firm is better off .....

marginal cost given shutting down

What is a sunk cost?

A cost that has already been committed and cannot be recovered

Is the size of a fixed-cost important in the short-run when firm is considering a shut-down?

No. Those costs cannot be recovered even by stopping production.

Why do restaurants with very few customers still stay open at lunch?

Because the fixed costs of forks, the kitchen, etc are already paid. It is only the wages of additional staff that must be covered

A firm exits a market if

The revenue it would get from producing is less than its total costs

Mathematically, what is the formula for a firm exiting a market?

If TR < TC

In terms of price, what is the formula for a firm exiting the market?

What is the formula for a firm entering a market?

P>ATC (TR > TC)

SKIP A competitive firm's long-run supply curve is---

the portion of its marginal-cost curve that lies above average total cost

At what point on the marginal cost curve should a firm exit the market. Why?

Below the intersection of the ATC curve. It will only sell goods at a price that cannot cover its costs.

If a long-run firm produces anything, it chooses the quantity at which ---- equals the price of the good. Yet, if the price is less than the ---- at that quantity, the firm chooses to ---- (or not enter the market)

Marginal cost average total cost exit

What is the formula for profit?

TR - TC

To measure profit in graphs, what is its formula?

Profit = (P- ATC) X Q (Tr/q -TC/q) X q)

What is the profit rectangle of a firm in a graph?

The difference between the price and the average total cost, at the quantity where the marginal cost intersects with the price.

A competitive firm should find Q...

where P = MC

If P

shut down immediately and remain out of business

if AVC < P < ATC,

operate in she short run but exit in the long tun

If ATC < P

stay in business and enjoy profits :)

Over the short term, how do you derive the market supply curve of 1000 firms?

you multiple the quantity supplied at each price, by the number of firms

If an individual firm supplies 200 units of a good for $2, and there 1000 comparable firms, what is the market supply at $2?

200,000 of the good

In the short-run, do firms enter and exit a market?

No.

When do firms enter a market?

If firms existing in the market are profitable.

What happens when a firm enters a market?

It increases the number of firms, which increases quantity of a good supplied which drives down prices and profits

What happens when a firm exits a market?

Reduce the number of firms and quantity suppliers, which drives up prices and profits

At the end of the process of entry and exit, firms that remain in the market must be making ____ economic profit

Zero

The process of entry and exit ends only when price and average total cost are

driven to equality

If competitive firms maximize profits by producing at a quantity where price = marginal cost, marginal and average total cost must themselves,

equal each other

What is the only point at which marginal cost and average total cost are equal?

When the firm is operating at the minimum of average total cost

The long-run equilibrium of a competitive market with free entry and exit must have firms operating at their

efficient scale

The long-run market supply curve in a long-run is..

perfectly horizontal and elastic, where ATC = Price

What happens when the price changes in the long-run competitive market?

It makes an incentives for firms to enter or exit the market which pushes the supply up or down and the profit back to equal ATC

Why do competitive firms stay in business even if they make zero profit?

If the revenue compensates their opportunity costs; it is not necessarily an accounting profit at all, which is certainly positive!

What are the three short-run phases of a long-run price fluctuation in a competitive market?

1) Initial condition 2) Short run response 3) Long-run response

what is the short-run response of a demand increase in a competitive market?

Demand rises and price rises accordingly, along with the quantity sold, to a new equilibrium.

What is the initial condition of a long-run demand fluctuation?

The market starts in a long-run equilibrium. Each firm makes zero profit, price equals the minimum average total cost.

Describe the graph of of a long-run demand increase of a competitive market

Price returns to the original price at at the minimum of average total cost of firms (the efficient scale) but quantity sold increases, because there are now more firms to meet the greater demand.

Why is the long-run supply curve (usually) perfectly elastic?

More or less firms can enter the market to produce at the same price, but at greater or less quantity sold.

What are two reasons that the long-run market supply curve might slope upward&

1) Resources used in production might have limited quantities 2) Firms may have different costs

What is the effect of an upwards sloping supply curve in a long-run competitive market

The future equilibrium will have a higher price, though one lower than the initial short-run response

What is the effect of a limited quantity of inputs in the long-run supply curve?

To supply higher quantities of a good and lower the price, more inputs must be placed in the production process, but their limited number raises their price, and hence the total cost to produce.

What is the effect of a differing producer costs in the long-run supply curve?

Ex: painters- new entrants to the market have higher total costs, so the market must be profitable for them to enter-- hence, a price increase

In the long-run equilibrium of a competitive market with identical firm, the relationship among price, marginal cost, and average total cost is...

P = MC = ATC

In the short run equilibrium of a competitive market with identical firms, if new firms are getting ready to enter, what are the relationships among price, marginal cost, and ATC?

P=MC, P>ATC

Suppose pretzel stands in Ottawa are a perfectly competitive market in the long-run equilibrium. One day, the city starts imposing $100 per month tax on each stand. How does the policy affect the number of pretzels consumed in the short run and long run?

no changes in the short decreases in the long run.

Chapter 14: Firms in competitive markets Flashcards

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