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Characteristics of a Perfect Competitive market
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Both buyers and sellers are price makers; number of firms is large; there are no barriers to entry; firms' products are identical (perfect substitutes); there is complete information; firms are profit maximing
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Equation for profit maximizing
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P=D=MR=AR
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MR is the same as
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Price
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When a firms operates in a perfectly competitive market
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Its supply curve is its short-run marginal cost curve above AVC
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The market/industry demand curve is
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Downward sloping
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The firm's demand curve is a
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Horizontal line (perfectly elastic); derived from market equilibrium price; price is the same no matter how much is produced
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Profit maximizing condition
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MC=MR=P
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MR > MC
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Firm can increase profit by increasing ouput
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MR < MC
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Firm can increase profit by decreasing output
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From what point does the MC curve is the firm's supply curve?
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Above AVC
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Total cost
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Cumulative sum of the marginal costs, plus the fixed costs
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Total profit
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Difference between total revenue and total cost curves
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When a firm has a profit in the short run, ATC is
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Below demand curve
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When a firm has a loss in the short run, ATC is
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Above demand curve
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When a firm has a zero profit or loss (normal profit) ATC
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Hits demand curve at minimum
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In the short run, fixed costs are
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Sunk costs; they must be paid whether or not the firm produces anything
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The firm's pays attention to its _________ costs when deciding to shutdown
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Variable
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When the price falls ________ AVC is when the firm should shutdown
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Below
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In the long run perfect competitors make
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Zero economic profit; exit and entry of firms
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Normal profit
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Amount the owners would have received in their next best alternative (breakdown point)
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Economic profit
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Profits above normal profits (where TR exceeds TC)
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Constant-Cost Industry
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assumption that entry and exit of firms has no impact on the cost curves of firms in the market;
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Increasing-cost Industry
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assumption that entrance of new firms increase the demand for the factor of production; cost curve shift upwards; profit is eliminated more easily and long run price is higher than in constant-cost industry
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Decreasing-cost Industry
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assumption that entrance of new firms decreases the price of key inputs; cost curves shift downward; take longer for profit to be eliminated, more firms can enter the market and new long run prices would be lower than in a constant cost industry
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If there are profits in a market
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firms enter the industry; supply increases; price decreases, eliminating profit
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If there are losses in a market
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firms leave the industry; supply decrease; price increase, eliminating losses
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The long run industry supply curve
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is a schedule of quantities supplied where firms are making zero profit
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What do the curves look like for constant-cost industry, increasing-cost industries, decreasing-cost industries?
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(in that order) horizontal long run, upward sloping long run, downward sloping long run
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Slope of the long run supply curve depends on
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what happens to factor costs when output increases
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Competitive firms maximize profit when
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MR=MC
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