Microeconomics Chapter 12

What conditions make a market perfectly​ competitive?
A market is perfectly competitive if:

1. Many buyers and sellers. Each individual buyer and seller is small relative to the entire​ market, and, as a​ result, cannot affect the market price. 2. All firms sell identical products. There can be no verifiable difference between the goods and services sold under perfect competition. 3. There are no barriers to entry into the market.

How should firms in perfectly competitive markets decide how much to​ produce?
Perfectly competitive firms should produce the quantity where

Perfectly competitive firms cannot control price and are consequently price takers. Economists assume that the objective of such firms is to maximize profit​ (total revenue minus total​ cost). ​Therefore, to maximize​ profit, a firm should produce the quantity of output where the difference between total revenue and total cost is as large as possible.

Total revenue equals:

Price multiplied by Quantity TR=PxQ

Average revenue equals:

Total revenue divided by the Quantity AR=TR/Q

Marginal revenue is:

the change in total revenue from selling one more unit of a​ product MR= change in TR/change in Q

Which of the following is an expression of profit for a perfectly competitive​ firm?

Profit for a perfectly competitive firm can be expressed as:

Profit= (P-ATC)xQ This is because… Profit= TR-TC Profit= (PxQ)-TC divide all by Q —> Profit/Q=(PQ)/Q-TC/Q This turns into Profit/Q=P-ATC, because ATC=average total cost=TC/Q. sooo, if you multiply it all by Q, Profit= (P-ATC)xQ

The figure to the right represents the cost structure for a perfectly competitive firm with its average total cost​ (ATC) curve, average variable​ (AVC) curve, and marginal cost​ (MC) curve. Fixed costs are​ $50.00.

Suppose the market price is ​$24.00 per unit.
Characterize the​ firm’s profit.

If the firm produces​ output, then it will:

experience losses

Production decision in the short​ run: If the firm​ produces, then it will produce an output level where price equals marginal cost.
If price is greater than average total​ cost, then the firm will make a profit.
If price is equal to average total​ cost, then the firm will break even.
If price is less than average total​ cost, then the firm will experience losses.

If price is greater than average total​ cost, then the firm will make a profit. If price is equal to average total​ cost, then the firm will break even. If price is less than average total​ cost, then the firm will experience losses.

​Shut-down point in the short​ run: In the short​ run, if price is greater than average variable cost​, then the firm should:

​However, if price is less than average variable cost​:

continue to produce​ (because the firm would lose an amount less than fixed costs by shutting​ down). the firm should stop production by shutting down.

​Break-even point:

A firm is breaking even when its total cost equals its total revenue.

Economic​ profit:

A​ firm’s revenues minus all its​ costs, implicit and explicit.

Since accounting profit generally only includes explicit​ costs:

breaking even corresponds to positive accounting profit. When breaking​ even, the wheat farmer should continue to produce in the long run because this is as high a return as she could earn elsewhere. Because economic profit takes into account all of the wheat​ farmer’s costs, she should continue to produce because she can cover all her implicit opportunity costs.

Entry and exit​ decisions in the long​ run:

If P​ > ATC​, then new firms will enter the market. If new firms​ enter, then the market supply curve will shift to the right(increase) and decrease the market price. If P​ < ATC, then existing firms will exit. If existing firms​ exit, then the market supply curve will shift to the​ left(decrease), and increase the market price.

What determines entry and exit of firms in a perfectly competitive industry in the long​ run?
In a perfectly competitive industry in the long​ run,

new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses. Entry and exit​ decisions: Profits and losses provide signals to firms that lead to entry and exit in the long run. For​ example, unless a firm can cover all its​ costs, it will shut down and exit the industry. More​ precisely, new firms will enter if existing firms are making a profit and existing firms will exit if they are experiencing losses.

​Long-run competitive​ equilibrium:

The situation in which the entry and exit of firms has resulted in the typical firm breaking even. The​ long-run equilibrium market price is at a level equal to the minimum point on the typical​ firm’s average total cost curve.

Profits and​ losses:

If P​ > ATC, then a firm will make a profit. If P​ = ATC, then a firm will break even. If P​ < ATC, then a firm will experience losses.

When firms are making a profit, in the long run:

firms will enter the market until the marginal firm is earning zero economic profit

Wheat farming:
Retail bookselling:
Manufacturing cell phones:
Bridge building:

Perfectly competitive, many firms, identical product, high ease of entry not p.c, many firms, differentiated product, high e.o.e not p.c., few firms, differentiated, low e.o.e. not p.c., few firms, differentiated, low e.o.e

TC=
TR=
VC=

ATC x Q P x Q AVC x Q

A firm makes a profit if:
A firm experiences a loss if:

P>ATC P<ATC

Profit equals revenue minus total cost ​(TC​), where revenue equals price multiplied by​ quantity:

Stated​ differently, this is equal to the profit margin​ (the difference in price and average total​ cost) multiplied by​ quantity:

The firm will break​ even, earning neither positive economic profits nor incurring​ losses, if:

Profit= (PxQ)-TC Profit= (P-ATC)xQ price equals the average total cost of production.

The shutdown point is:

the minimum point on a​ firm’s average variable cost​ curve; if the price falls below this​ point, the firm shuts down production in the short run. This is because if price is less than the average variable cost of​ production, then the firm is not receiving enough revenue from producing to cover its variable​ costs, with no money left over to pay for any of its fixed costs. If the firm shuts​ down, then its loss equals the fixed cost of production.

In perfectly competitive​ markets, prices are determined by

the interaction of market demand and market supply

In perfect​ competition, long-run equilibrium occurs when the economic profit is

zero

What is a price​ taker?
A price taker is:

a firm that is unable to affect the market price.

When are firms likely to be price​ takers?
A firm is likely to be a price taker when:

it represents a small fraction of the total market

Why do single firms in perfectly competitive markets face horizontal demand​ curves?

With many firms selling an identical​ product, single firms have no effect on market price.