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market structure
important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit and forms of competition
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perfect competition
- many buyers and sellers
- firms sell a commodity
- buyers and sellers are fully informed about the price and availability of all resources and products
- firms and resources are freely mobile
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commodity
standardized product that does not differ across producers
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demand curve under perfect competition
perfectly horizontal
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price taker
a firm that faces a given market price and whose quantity supplied has no effect on that price, they must take the market price
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marginal revenue
- MR
- firm's change in total revenue from selling an additional unit
- in a perfectly competitive firm marginal revenue equals market price
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short-run profit maximization
- the total revenue curve for a perfectly competitive firm is a straight line equal to the market price
- total cost increases with output, firs at a decreasing rate and then an increasing rate
- economic profit is maximized where total revenue exceeds total cost by the greatest amount
- marginal revenue is a horizontal line at the market price
- economic profit is maximized where marginal revenue equals marginal cost
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golden rule of profit maximization
- to maximize profit or minimize loss, a firm should produce the quantitiy at whic marginal revenue ezuals marginal cost
- holds true for all market structures
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average revenue
- AR=TR/q
- in all market structures revenue equals market price
- in perfect competition, market price=marginal revenue=average revenue
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short-run loss minimization
- when total cost exceeds total revenue, minimum economic loss occurs where the curves are closest
- where marginal revenue equals marginal cost , the firm is better off producing in the short run since revenue covers some fixed costs
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shutting down in the short run
if average variable cost exceeds the price at all rates of output, the firm shuts down
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short-run firm supply curve
- a curve that shows how much a firm supplies at each price in the short run
- in perfect competition, that portion of a firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve
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short-run industry supply curve
- a curve that indicates the quantity supplied by the industry at each price in the short run
- in perfect competition, the horizontal sum of each firm's short-run supply curve
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long-equilibrium for a firm and the industry
- the firm produces q units of output per period and earns a normal profit
- when price, marginal cost, marginal revenue, short-run average total cost , and long-run average cost are all equal; there is no reason for new firms to enter the market or for existing firms to leave
- as long as the market demand and supply curves remain unchanged, the industry will continue to produce a total of Q units of output at price p
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long-run industry supply curve
a curve that shows the relationship between prive and quantity supplied by the industry once firms adjust in the long run to any change in market demand
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constant-cost industry
- an industry that can expand or contract without affecting the long-run per-unit cost of production
- the long-run industry supply curve is horizontal
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increasing-cost industry
- an industry that faces higher per-unit production costs as industry output expands in the long run
- the long-run industry supply curve slopes upward
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production efficiency
- the condition that exists when production uses the least-cost combination of inputs
- minimum average cost in the long run
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allocation efficiency
- the condition that exists when firms produce the output most preferred by consumers
- marginal benefit equals marginal cost
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producer surplus
- a bonus for producers in the short run
- the amount by which total revenue from production exceeds variable cost
- the combination of consumer surplus and producer surplus shows the gains from voluntary exchange
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social welfare
- the overall well-being of people in the economy
- maximized when the marginal cost of production equals the marginal benefit to consumers
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