chapter 9 Flashcards
(31 cards)
describe a PERFECTLY COMPETITIVE MARKET
market conditions
- undifferentiated products
- perfect information
- price takers
- all firms have equal access to resources ( no barriers to entry )
implications of conditions
- the law of one price
- price takers
- free entry
how do perfectly competitive firms profit maximise
profit = TR - TC
as P is given , firms adjust Q to reach profit max
MR = P
MR = MC
P = MC and MC is rising
describe the SHORT RUN COST STRUCTURE
STC(Q) = SFC + NSFC + TVC(Q) WHEN Q > 0
= SFC WHEN Q = 0
SFC - sunk fixed costs
NSFC - non sunk fixed costs
for NSFC , SFC and VC answer
a. avoidable in SR ?
b. dependent on quality ?
c. airline example
SFC
a. no
b. no
c. aircraft
NSFC
a. yes
b. no
c. wages for crew
VC
a. yes
b. yes
c. inflight meal
describe the SR supply curve
tells us how profit maximising Q changes as market price changes
P = SMC
describe SRSC when all fixed costs are sunk
given that TFC = SFC + NSFC
if NSFC = 0
TFC = SFC
describe SRSC pricing
a profit maximising price taking firm never produces where P < AVC
if the market price is less than AVC we denote it as the SHUT DOWN PRICE as the firm would chose to produce 0 output
at price below SAC but above AVC the firm still operates as it loses less money by producing than it would by not producing
in this SR supply function what are the
STC (Q) = 100 + 20Q + Q^2
a. TFC
b. TVC(Q)
c. AVC(Q)
D. SMC(Q)
a. = 100 (sunk)
b. 20Q + Q^2
c. 20 +Q
d. 2Q +20
describe market supply and equilibrium
the market supply at any price is the sum of quantities each firm supplies at that price
the SRMS curve is the horizontal sum of individual firm supply
describe SHORT RUN PERFECTLY COMPETITIVE EQUILIBRIUM
occurs when market supply = market demand
SUM Qs(P) = Qd(P)
where Qs(P) is determined by the firms individual profit maximisation condition
if the typical firm produces at Q* where MC = MR and there are 100 firms in the market. what Q is the market equilibrium ?
100Q*
how do you derive a SR market equilibrium ?
QD = P to solve for P* and then sub it in the Q equation to finds Q*
when does the supply curve shift ?
when the number of firms in the market changes
what is SHUTDOWN PRICE ?
MC = ANSC = P
what is meant by LONG RUN ?
the period of time in which all the firms inputs can be adjusted. the number of firms in the industry can change aswell
the firm should use long run cost functions for evaluating the costs of outputs it might produce in this longer period, i.e. decisions to modify plant size, enter or exit, change production process and so on would all be based on longer term analysis
how do long run firms profit maximise ?
in the long run firms can increase its profits by increasing the plant size
LR profit maximisation with respect to output and plant size
P* = MC(Q)
zero economic profit
P* = AC(Q*)
MD = MS
Qd(P) = NQ* or N* = Qd(P) / Q
describe a long run perfectly competitive firm
P* = LRMC = LRAC
firms produce at Q* = MES
describe the LR market supply curve
tells us the total quantity of output that will be supplied at various market prices assuming that all long run adjustments take place
since new entry can occur in the LR we cannot calculate the market supply curve by horizontally summing the individual firms supply curves
instead we must construct the curve. we reason that in the LR output expansion or contraction in the industry occurs along a horizontal line corresponding to the minimum level of LRAC
if P > min(AC), entry would occur driving price back to min(AC)
if P < min(AC), firms would earn negative profit and supply nothing
what is a constant cost industry ?
an industry in which the increase or decrease of industry output doesn’t affect the price of inputs
what is an increasing ,
/ decreasing cost industry ?
an industry which, increases in industry output, increase the price of inputs
the reverse for decreasing
what is economic rent ?
measures the economic surplus that is attributable to on extraordinarily productive input whose supply is limited
the difference between the max amount a firm is willing to pay for the services on the input and the inputs reservation value
area on the curve - between where mc and higher ac cross and the lowest point of ac 1
what is the reservation value ?
the returns that the owner of an input could get by deploying the input in its best alternative use outside the industry
what is producer surplus ?
area above the market supply curve and below the market price
difference between the price they would be willing to sell at and the price they actually do ( market price )
amount producer is paid - costs of production
a monetary measure of the benefit that producers derive from producing a good at a particular price
describe producer surplus in a constant cost industry ( perfect comp )
in LR equilibrium a price taking firm earns zero economic profit
a firms producer surplus = economics profit in the LR . then the producer surplus in perf comp LR = 0
