Econ 201 ch 8

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  1. 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
  2. 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
  3. commodity
    standardized product that does not differ across producers
  4. demand curve under perfect competition
    perfectly horizontal
  5. 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
  6. marginal revenue
    • MR
    • firm's change in total revenue from selling an additional unit
    • in a perfectly competitive firm marginal revenue equals market price
  7. 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
  8. 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
  9. average revenue
    • AR=TR/q
    • in all market structures revenue equals market price
    • in perfect competition, market price=marginal revenue=average revenue
  10. 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
  11. shutting down in the short run
    if average variable cost exceeds the price at all rates of output, the firm shuts down
  12. 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
  13. 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
  14. 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
  15. 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
  16. 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
  17. 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
  18. production efficiency
    • the condition that exists when production uses the least-cost combination of inputs
    • minimum average cost in the long run
  19. allocation efficiency
    • the condition that exists when firms produce the output most preferred by consumers
    • marginal benefit equals marginal cost
  20. 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
  21. social welfare
    • the overall well-being of people in the economy
    • maximized when the marginal cost of production equals the marginal benefit to consumers
Card Set:
Econ 201 ch 8
2011-05-14 03:26:03

perfect competition
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