Econ Exam 2 (Chapter 8)

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  1. Perfect competition
    • There are many small firms and many small consumers
    • The firms sell a homogeneous product (commodity)
    • Everyone (buyers and sellers) has access to full information
    • There is unrestricted entry and exit to the market, (but not necessarily "costless"
    • Prices are not fixed or regulated by the state
  2. Homogeneous products
    • Standardized products
    • Undifferentiated products; products that are identical to, or indistinguishable from, one another
  3. Explain many small firms
    • Firms can change their level of output without affecting the price
    • "Price takers"
    • There are also so many small consumer who cannot affect the price either
    • Demand is Elastic
  4. Explain Homogeneous Product
    • All firms sell goods that are basically interchangeable Consumers will only care about the price of good with no quality difference
    • Most goods do not fit this requirement
    • Ex. Wheat, cooper, stocks
    • Demand is Elastic
  5. Explain Full information
    • All buyers and sellers can "see" the demand and cost curves and know what price they should buy or sell the good for
    • Buyers should know exactly what they are buying
  6. Explain free entry and exit
    • Ensures that unprofitable firms can leave the market and that new firms can enter profitable markets
    • Entry may cost money but there are no barriers keeping from entry
  7. Explain Prices not regulated
    • Prices must be allowed to move to the equilibrium price for a market to be truly competitive¬†
    • Not prices floors or ceilings
  8. Price Taker
    • Price taken comes from equilibrium
    • Perfectly competitive firm
    • No price policy
    • Individual firms do not have power to ask for price above the market price
    • P=MR=AR
    • -P = market clearing price (S and D intersect)
  9. What firms decide in perfect competition
    • Only choice is level of output that will maximize profit
    • MR=MC
    • P=MC
  10. Profit Maximization
    • As long as Marginal revenue is greater than marginal cost, even though it gets smaller, added output means added profit
    • Perfectly competitive firm will produce up to the point where the P=MC
    • Profit Maximizing output level for all firms is MC= MR (or P, d, in perfect competitive)
  11. Under perfect Competition
    • Prices is determined by market
    • Price will always equal marginal revenue
  12. Short run supply curve for a perfectly competitive firm
    Is the marginal cost curve once it cross the AVC curve
  13. Operating proft (or loss) or net operating revenue
    Total revenue minus total variable cost (TR-TVC)
  14. Shut-Down Point
    • When price is less that AVC for all positive quantities the firm should stop producing and bear losses equal to fixed costs
    • Bottom of the average cost curve
    • -All prices bove is shows profit maximizing level of output
    • -All prices below show optimal short run output is zero
    • Total revenue is insufficient to cover variable costs
  15. Long run conditions in competitive firms
    • All firms must earn zero profit
    • The price will be pushed down to the minimum average cost
    • MC=AC=P
    • If a firm is earning positive economic profit then more firms will enter shifting the supply curve out thus forcing prices down until profits = 0
  16. Long run equilibrium Price
    • Short Run Marginal Cost = Short Run Average Cost = Long Run Average Cost
  17. Long run Adjustments: Increase in demand
    • If demand curve shifts firms will be temp. earning profit which will push more firms to enter the market shifting out the supply curve until profit is 0 again
    • Assuming constant cost industry, costs remain the same despite growth in productions
  18. Decreasing cost industry
    When the long range average costs decrease as a result of industry growth
  19. Increasing cost industry
    Average costs increase as a result of industry growth
  20. Long run industry supply curve
    • A graph that traces out price and total output over time as an industry expands
    • -Increasing cost industry LRIS rises as total Q rises
    • -Decreasing cost industry, the LRIS falls as total Q rises
    • -Constant cost industry, the LRIS stays flat as total Q rises
  21. Why do economist see perfect competition as the "ideal" market structure?
    A PC market achieves both "Allocative" and "Productive" efficiency -the market supplies the right stuff (allocative) and the lowest possible cost (productive)
  22. Allocative Efficiency
    • Producing what the people want, condition that ensures the right things are produced
    • Society will produce that effiecient mix of output if all firms equate price (marginal benefit) and marginal cost
  23. Consumer Surplus
    area above the market clearing price and below demand
  24. Producer surplus
    Area above the short run market supply curve and below the market clearing price
  25. Productive efficiency
    Making stuff the right way, firms are forced to use the least cost combination of inputs and achieve minimum average cost in the long run
  26. Market Failure
    • When resources are misallocated, or allocated inefficiently. The result is waste or lost value
    • Sources of market failure
    • -Imperfect market structure, noncompetitive behavior
    • -Imperfect information
    • -The existence of public goods
    • -The presence of external costs and benefits
  27. Imperfect Competition
    An industry in which single firms have some control over price and competition. Imperfectly competitive industries give rise to an inefficient allocation of resources
  28. Monopoly
    An industry composed of only one firm that produces a product for which there are no close substitutes and in which significant barriers exist to prevent new firms from entering the industry
  29. Imperfect information
    The absence of full knowledge concerning product characteristics, available prices, and so forth
  30. Public goods, or social goods
    Goods or services that bestow collective benefits on members of society. No one can be excluded from there benefits, fire department, air
  31. Private goods
    Products produced by firms for sale to individual households
  32. Externalities
    A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction
Card Set:
Econ Exam 2 (Chapter 8)
2014-10-28 17:13:33
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