Profit
the difference between total revenue and total cost
Economic Cost
The value of all resources used to produce a good or service; opportunity cost
Explicit Cost
A payment made for the use of a resource
Implicit Cost
The value of resources used, for which no direct payment is made
Economic Profit
The difference between total revenues and total economic costs
Normal Profit
The opportunity cost of capital; zero economic profit -Normal rate of return
Monopoly
A firm that produces the entire market supply of a particular good or service
Market Structure
The number and relative size of firms in an industry
Perfect Compeition
A market in which no buyer or seller has market power
Market Power
The ability to alter the market price of a good or service
Price Takers
Take the price that the market sets
Perfectly Competitive Industry Characteristics:
1. Many firms - Lots of firms are competing for consumer purchases2. Identical products - The products of the different firms are identical, or nearly so3. Low entry barriers - Its relatively easy to get into the business
A perfectly competitive firm is one....
Whose output is so small in relation to market volume that its output decision have to perceptible impact on price
The market demand curve for a product is always:
Downward sloping (law of demand)
The demand curve confronting a perfectly competitive firm is:
Horizontal (perfectly elastic)
Production Decision
The selection of the short-run rate of output (with existing plants and equipment)
Fixed Costs
Costs of production that don't change when the rate of output is altered, such as the cost of basic plants and equipment
Variable Costs
Costs of production that change when the rate of output is altered, such as labor and material costs
The total revenue curve of a perfectly competitive firm is:
An upward sloping straight line
Marginal Cost
The increase in total costs associated with a one-unit increase in production
Marginal Revenue
The change in total revenue that results from one-unit increase in the quantity sold= Change in total revenue/Change in output
For perfectly competitive firms, price equals:
Marginal revenue
Profit Maximization
Produce at that rate or output where marginal revenue (p) equals marginal cost
Three possible scenarios for MC and price:
MC > p ---> If MC exceeds price, we are spending more to produce the extra unit than we're getting back: total profits will decline if we produce itp > MC ---> If an extra unit it bringing in more revenue than it costs to produce, it is adding to total profit. A competitive firm wants to expand rate of product whenever price exceeds MCp = MC ---> For perfectly competitive firms, profits are maximized at the rate of output where price equals marginal cost
Total Profits =
TR-TCand (p-ATC) x q--> Do from curve on graph
Profit per Unit =
Price - ATC
When price exceeds average variable cost but not average total cost, the profit maximization rule:
Minimizes losses
Where price doesn't cover average variable costs at any rate of output, production should:
Cease
Shutdown Point
The rate of output where price equals minimum AVC
Shutdown decision is a _______ _____ response
Short-run
Investment Decision
The decision to build, buy, or lease plants and equipment; to enter or exit an industry-Long-run decision
The determinants of a firm's supply include:
-Price of factor inputs-Technology-Expectations-Taxes and subsidies ****All shift the MC upward or downward
The marginal cost curve is the:
Short-run supply curve for a competitive firm that lies above the average variable cost curve
Payroll taxes increase:
Marginal cost
Accounting Profit =
total revenue - total explicit costs
Economic Profit =
total revenue - total economic cost (explicit costs + implicit costs)
Firm vs Industry or Market
A market or industry consists of all firms operating in that type of business
Competitive Firm
Firms that have no market power
Various degrees of competition and different types of markets:
Perfect competition to imperfect competition and monopoly
Revenue =
Price x Quantity
Demand curve is:
Marginal revenue curve
Shutdown Decision
Firms should shutdown only if total revenues < total variable costsIf price drops below (or is equal to AVC), firm should shut downIf total losses exceed total fixed cost by continuing production, he should cease production
Taxes affect average total cost and marginal cost curves as follows:
Profit taxes: affect neitherProperty taxes: affect only average total costPayroll taxes: affect both average and marginal costs
A firm's demand curve is perfectly ________ while market demand curve is _____________ _________________
Flat/Downward Sloping (law of demand)
In the long-run, firms must cover:In the short-run, firms continue to operate as long as:
-all costs, explicit and implicit or exit the industry (investment decision)-it's variable costs are covered
Market equilibrium occurs when:
Marker supply crosses market demand
If a perfectly competitive firm wanted to maximize its total revenues, it would produce:
As much output as it is capable of
If price exceeds average variable cost but is less than average total cost, a firm should, in the short run:
Produce at rate where price (MR) = MC