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2013-07-22 04:18:19
Chapter 23 Perfect Competition

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  1. Perfect competition
    A market structure in which the decisions of individual buyers and sellers have no effect on market price.
  2. Perfectly competitive firm
    A firm that is such a small part of the total industry that it cannot affect the price of the product it sells.
  3. Price taker
    A perfectly competitive firm that must take the price of its product as given because the firm cannot influence its price.
  4. Reason for a Perfectly. Competitive Market.
    1. There are large numbers of buyers and sellers.

    2. The product sold by the firms in the industry is homogeneous. (perfect substitute for the product sold by every other firm).

    3. Both buyers and sellers have access to all relevant information.

    4. Any firm can enter or leave the industry without serious impediments.
  5. profit-maximization model
    which assumes that firms attempt to maximize their total profits—the positive difference between total revenues and total costs.
  6. Total revenues
    The price per unit times the total quantity sold. (They are the same as total receipts from the sale of output.)

    = (Price Per Unit) X ( Quantity Sold)
  7. Average Revenue
  8. Profit-maximizing rate of production
    The rate of production that maximizes total profits, or the difference between total revenues and total costs. Also, it is the rate of production at which marginal revenue equals marginal cost.
  9. Marginal revenue
    The change in total revenues resulting from a one-unit change in output (and sale) of the product in question.

    Marginal revenue =change in total revenues change in output

  10. Marginal Revenue, Price Line, & Demand Curve
    In a perfectly competitive market, the marginal revenue curve is exactly equivalent to the price line, which is the individual firm’s demand curve.

    P = MR = d
    Whenever marginal cost is less than marginal revenue,the firm will always make more profit by increasing production.
    Profit maximization occurs at the rate of output at which marginal revenue equals marginal cost.
  13. The Short-Run Break-Even Price and the Short-Run Shutdown Price
    A firm goes out of business when the owners sell its assets to someone else. A firm temporarily shuts down when it stops producing, but it still is in business.

    In the short run, as long as the loss from staying in business is less than the loss from shutting down, the firm will remain in business and continue to produce
  14. Short Run Remain Open
    As long as the price per unit sold exceeds the average variable cost (labor) per unit produced,the earnings of the firm’s owners will be higher if it continues to produce in the short run than if it shuts down.
  15. Short-run break-even price
    The price at which a firm’s total revenues equal its total costs. At the break-even price,the firm is just making a normal rate of return on its capital investment. (It is covering its explicit and implicit costs.) 

    P=MC and P=ATC.
  16. Short-run shutdown price
    the price that covers average variable costs. It occurs just below the intersection of the marginal cost curve and the average variable cost curve.
  17. Short-run prefect competition supply curve
    By definition, then, a firm’s short-run supply curve in a competitive industry is its marginal cost curve at and above the point of intersection with the average variable cost curve.
  18. What is an industry
    It is merely a collection of firms producing a particular product.
  19. Industry supply curve
    The locus of points showing the minimum prices at which given quantities will be forthcoming; also called the market supply curve.

    S = ΣMC
  20. Effect Industry Supply curve
    Therefore, the individual factors that will influence the supply schedule in a competitive industry can be summarized as the factors that cause the variable costs of production to change.

    These are factors that affect the individual marginal cost curves, such as changes in the individual firm’s productivity, in factor prices (such as wages paid to labor and prices of raw materials), in per-unit taxes.

    Will cause shift of supply curve
  21. Signals
    Compact ways of conveying to economic decision makers information needed to make decisions. An effective signal not only conveys information but also provides the incentive to react appropriately. Economic profits and economic losses are such signals.
  22. Long-run industry supply curve
    A market supply curve showing the relationship between prices and quantities after firms have been allowed the time to enter into or exit from an industry, depending on whether there have been positive or negative economic profits.
  23. Constant-Cost industry
    An industry whose total output can be increased without an increase in long-run per-unit costs. Its long-run supply curve is horizontal. (Banks and Retail stores).

    Examples are residential construction and coal mining
  24. Increasing-cost industry
    An industry in which an increase in industry output is accompanied by an increase in long run per-unit costs, such that the long-run industry supply curve slopes upward.
  25. Decreasing-cost industry
    An industry in which an increase in output leads to a reduction in long-run per-unit costs, such that the long-run industry supply curve slopes downward.
  26. Marginal cost pricing
    A system of pricing in which the price charged is equal to the opportunity cost to society of producing one more unit of the good or service in question. The opportunity cost is the marginal cost to society.
  27. Market failure
    A situation in which an unrestrained market operation leads to either too few or too many resources going to a specific economic activity.