Chapter 8 Flashcards
Equilibrium of a Profit Maximizing Firm
-Decision of the firm to choose price and output
-Once Firm Selects a Price, the quantity sold is up to the consumers
-If a firm chooses output, they have to leave it up to the market to determine the price that they sell it at.
Total revenue rule
Revenue = Price * Output
Average Revenue Rule
Average Revenue = Revenue / Output (q)
Marginal Revenue Rule
Change in Revenue / Change in output
Profit (pi)
total revenue - cost
What two rules does a firm have to follow to maximize profit in the short run?
-It should only produce if total revenue is greater than or equal to total variable costs
-A firm maximizes profit when it chooses the quantity where marginal costs equals marginal revenue
Theory of Perfect Competition Characteristics (5)
- All firms in the market sell a homogenous product (perfect substitute)
- Consumers and producers know the nature of the product being sold and prices charged by each firm (can not be fooled)
- There are many buyers and sellers in the market
- The industry is characterized by freedom of entry and exit
- Individual firms are price taxers. An individual firm has no power to influence market through which its product is being sold
Where does profit maximization occur in the short-run
Where MC = MR
Where does profit maximization in the short run in a perfectly competitive market occur?
where P = MR =. MC
In the long run, all costs are ______
variable
In the long run firms can _______
enter/exit the market
Where does long run equilibrium occur in a perfectly competitive market?
Where Pi = MC = ATC = P
Producers Surplus
What producers are paid - what producers are willing to accept
