Chapter 7 Flashcards
(21 cards)
Pure Competition
- Very large number of firms
- producing a standardised product
- No control over price
- Easy entry/exit
- No non-price competition
standardised product: identical to that of other producers
Pure Monopoly
- One firm constitutes the entire industy
- Produces a unique product
- Considerable control over price
- Entry is blocked
- Non-price competition: advertising, public relations
Monopolistic Competition
- Many sellers
- Producing a differentiated product
- Some control over price
- Entry is relatively easy
- Widespread non-price competition
Non-price competition: strategy to distinguish product from others
Oligopoly
- Few sellers
- Producing a standardised or differentiated product
- Control over price is limited by mutual interdependence
- Entry has signigicant obstacles
- Non-price competition is a great deal: product differentiation
Each firm is affected by the decisions of its rivals
Pure competition
expanded
- Very large number of independently acting sellers, offering products in large national or international markets
- Produce an identical or homogeneous product. If price is the same, consumers will be indifferent about which seller to buy from. No non-price competition because firms dont differentiate their products
- They are price takers: no significant control over product price. Each firm produces a small fraction of total output: will not influence total supply
- No significant legal, technological, financial or other obstacles prohibit entry and exit
Demand of an individual firm in pure competition
The demand schedule faced by the individual firm in a purely competitive industry is perfectly elastic
- The firm cannot change the market price; firms are price takers
An entire industry can still affect price by changing the total ouput
Purely competitive firms: Demand and revenue curve
of an individual firm in pure competition
- Demand curve: horizontol line - perfecly elastic
- TR curve: constant upward sloping line; price is constant
- Marginal revenue curve and Average revenue curve coincide with the firm’s demand curve
D = MR = AR
Average Revenue (AR)
Pure Competition
A firms demand curve is also its AR curve
The price per unit to the purchaser = revenue per unit
Price and Average revenue is the same thing
AR = TR/Q
Total Revenue (TR)
Pure Competition
Found by multiplying price by the corresponding quantity
TR = P x Q
Marginal Revenue (MR)
Pure Competition
Change in total revenue from selling one more unit of output
firm will consider how TR will change as a result of change in output
MR = ΔΤR / ΔQ
Profit Maximization in the Short Run
Fixed plant; A firm can only adjust variable resources to achieve the output level that maximises its profit
- total revenue - total cost
or - Compare marginal revenue and marginal costs
Producer will ask:
1. Should product be produced? 2. In what amount? 3. What economic profit?
Total Revenue - Total Cost Approach
Profit Maximization in the Short Run
- Profit is maximised where TR exceeds TC by the maximum amount
- Profit/Loss = TR - TC
- TR = TC: Normal Profit
Total Revenue - Total Cost
Graphically
- Break-even point (Normal Profit): Where TR and TC intersect
- Maximum profit: Where the vertical distance between TR and TC curves is greatest
Marginal Revenue - Marginal Cost Approach
Profit Maximization in the Short Run
The firm will maximize profit or minimize loss where MR = MC, and producing is preferable to shutting down.
MR = MC rule
A competitive firm will maximise profit/minimise loss in the short run by producing that output at which MR (=P) = MC; provided that market price exceeds minimum average variable cost (P > AVC)
* Firm will shut down unless MR = MC
* Price and Marginal Revenue are the same (P = MC = MR)
* Rule only applies if producing is preferable to shutting down. If MR does not exceed or equal AVC, the firm will shut down
Economic Profit =
Profit = (P - ATC) x Q
Profit Maximising Case
Profit Maximization in the Short Run
P > ATC at the output where MR (= P) = MC
Price exceeds ATC at the output where MC = P = MR
Loss Minimizing Case
Profit Maximization in the Short Run
AVC < P < ATC
Loss in minimized by producing where MC = MR
Price exceeds AVC but is less than ATC
Shut Down Case
Profit Maximization in the Short Run
P < AVC
Price is less than the minimum AVC
Break Even Case
Profit Maximization in the Short Run
P = ATC at the output where MR (= P) = MC
Price is equal to ATC
Marginal Cost and Short-run Supply
The proportion of the firm’s marginal cost (MC) curve lying above its average variable cost (AVC) curve is its short-run supply curve
MC curve above the AVC curve = Supply curve
Quantity supplied = zero at any price below the minimum AVC
