Market
- may be an organized exchange
- refers to a set of sellers and buyers whose actions affect a commoditys price
- is that area in which buyers and sellers compete to affect a product price
A competitive firm is a price
taker
Characteristics of a perfectly competitive market
a large number of small firms
Characteristics of perfect competition
- profits are low in the long run
- consumers pay little attention to brand names
- firms pay no attention to their competitors output levels
Perfect Competition is the term used to describe
an industry in which numerous firms produce identical products
Closest to the economists definition of perfect competition
the fishing industry
Result that perfect competitive firms produce at the lowest per-unit cost is derived for the assumptions of
free entry and exit
A firm facing a horizontal demand curve
- cannot affect the price it receives for its output
- always produces at an output at which P=MR
= faces perfectly elastic demand for its product
Which decision cannot be taken by a firm in a perfectly competitive market?
market price of the product
The demand curve for a perfectly competitive firm is
perfectly elastic
There is only one price for a product in a
perfectly competitive market
A firm in a perfectly competitive market can sell as much as it wants at
market price
A perfectly competitive firms short run equilibrium level of output equals
P=MR=MC
A firms earns a profit of exactly zero at its optimal output level only if
P=AC
If a competitive firms short run AVC curve lies above the price of the product, we can conclude that the firm
is incurring losses
A firm can stay in business while taking a loss in the short run as long as it covers its
variable costs
a firm will shut down in the short run if
TC-TR > TFC
The short run supply curve of the perfect competitive firm is the firms
MC curve above the minimum point on the AVC curve
The quantity which a firm will supply in the short run (its short run supply curve)
can be read from the firms marginal cost curve above AVC
a perfectly competitive firm should continue to expand output until
marginal revenue = marginal cost
The short run for the industry is defined as a period
- too brief for new firms to enter the industry
- too brief for old firms to leave the industry
- in which the number of firms in the industry is fixed
When a firm leaves a perfectly competitive industry
- the individual demand curves facing remaining firms shirt toward the point of minimum AC in the long run
a firm in a perfectly competitive industry
may choose a different output in the long run than in the short run
We expect the demand curve in the perfectly competitive industry to be
negatively slopes
Perfectly competitive firms always earn zero economic profit in the long run equilibrium because
firms enter whenever their economic profit is positive and exit when its negative, so in long-run equilibrium economic profit must always be zero
Long-run AC of the perfectly competitive firm includes
- cost of raw materials per unit of output
- opportunity cost of labor per unit of output
- opportunity cost of capital per unit of output
The entry of firms into a perfectly competitive industry causes the supply curve to
move toward the right
an increase in market demand will cause an increase in industry output in the long run because
new firms enter the industry
The long run supply curve of an industry equals the industrys
long-run average cost curve
Firms will continue to enter a perfectly competitive industry until
economic profit will be reduced to zero
the entry of new firms into an industry will very likely
- shift the industry supply curve to the right
- cause the market price to fall
- reduce the profits of existing firms in the industry
In long-run equilibrium, the perfectly competitive firm produces
- where P=MC=ATC
- at the lowest point on its long run average cost curve
- where its long-run average cost curve is tangent to its horizontal demand curve
Pure Monopoly is defined as
one-firm industry
The U.S. Government
intervenes to prevent the monopolization of some markets and actively encourages the monopolization of others
Which of the following can serve as an entry barrier?
- legal restrictions
- patents
- control of scarce resources or inputs
The south african diamond production monopoly is an example of monopoly through
- control of scarce resources
A natural monopoly is defined as an industry in which one firm
can produce the entire industry output at a lower average cost than a larger number of firms could
A market structure in which only one firm has survived because of its economies of scale is called a
natural monopoly
The marginal revenue curve for a monopolist
is always below its demand curve if the demand curve is downward sloping
A monopolists AVC is tangent to his demand curve. The monopolist is
earning zero economic profit
A monopolist maximizes profits by producing where which of the following occur?
MC=MR
Key assumption of a perfectly competitive market
each seller has a very small share of the market
Total Revenue is equal to
price times quantity
a firm maximizes profit by operating at the level of output where
MR equals MC
If current output is less than the profit-maximizing output, then the next unit produced
will increase revenue more than it increases cost
At the profit-maximizing level of output, marginal profit is
zero
The demand curve facing a perfectly competitive firm is
the same as its average curve and its marginal revenue curve
Because of the relationship between a perfectly competitive firms demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as
P=MR
The amount of output that a firm decides to sell has no effect not he market price in a competitive industry because
the firms output is a small fraction of the entire industrys output
If a graph of a perfectly competitive firm shows that the MR=MC point occurs where MR is above AVC but below ATC
the firm is earning negative profit, but will continue to produce where MR=Mc in the short run
What is true about a Monopoly
- monopoly demand curve is downward sloping
- monopoly is the sole producer in the market
- monopoly price is determined from the demand curve
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a
higher price and sell a smaller quantity
For a monopolist, at every output level, average revenue is equal to
price
If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be
positive
A monopolist has equated marginal revenue to zero. The firm has
maximized total revenue
marginal revenue, graphically, is
the slop of the total revenue curve at a given point
At the profit maximization level of output, what is true of the total revenue (TR) and total cost (TC) curves?
They must have the same slope
If current output is less than the profit maximizing output, what must be true?
marginal revenue is greater than marginal cost
The demand curve facing a perfectly competitive firms marginal revenue curve is
the same as its average curve and its marginal revenue curve