question
Characteristics of Competitive Markets
answer
-many sellers
-similar products
-free entry and exit
-price taking
-every firm is small
-similar products
-free entry and exit
-price taking
-every firm is small
question
Price Taker
answer
has no control over the price set by the market
question
Marginal Revenue (MR)
answer
the change in total revenue from selling one more unit of a product
MR= change TC / change Q
MR= change TC / change Q
question
Marginal Cost (MC)
answer
the change in total costs associated with a one-unit change in output
MC = change TR/ change Q
MC = change TR/ change Q
question
marginal analysis
answer
analyze one output at a time and inspecting the MC and MR
question
Profit Maximizing Rule
answer
profit is maximized by choosing the level of output such that MR=MC
question
How to Calculate Profit
answer
Profit = (price- ATC)(Q)
question
Firms in the short run
answer
firms can't always make a profit
- shutting down
- a firm will shut down if it can't cover variable costs
- shutting down
- a firm will shut down if it can't cover variable costs
question
Profit and Loss in Short Run
answer
P > ATC - firm makes a profit
ATC > P > AVC - firm will operate to minimize loss
AVC> P - firm will temporarily shut down
ATC > P > AVC - firm will operate to minimize loss
AVC> P - firm will temporarily shut down
question
long-run supply curve
answer
competitive form's output decision is directly tied to profits
P > ATC- firm makes a profit
P < ATC- firm should shut down
P > ATC- firm makes a profit
P < ATC- firm should shut down
question
Short-Run Supply Curve
answer
when revenues are too low, no supply is produced
- supply curve doesn't exist
when operating, it bases its output decisions on marginal costs
- MC curve is the firms short run supply curve as long as its operating
- supply curve doesn't exist
when operating, it bases its output decisions on marginal costs
- MC curve is the firms short run supply curve as long as its operating
question
How does long run differ from short run
answer
1. Firms can adjust all inputs and fixed costs are not sunk
2. There is entry and exit
- profit in long run is zero
2. There is entry and exit
- profit in long run is zero
question
What does the supply curve look like in a perfectly competitive market?
answer
short run
- a firm may choose to operate at a loss to recover portion of fixed costs
long run
- firm is willing to operate only if it expects the price it charges to cover total costs
- a firm may choose to operate at a loss to recover portion of fixed costs
long run
- firm is willing to operate only if it expects the price it charges to cover total costs
question
sunk cost
answer
unrecoverable costs that have been incurred as a result of past decisions
should be excluded from future decisions because the cost will be the same regardless of outcome
should be excluded from future decisions because the cost will be the same regardless of outcome
question
sunk cost fallacy
answer
Considering sunk costs when making new decisions at the margin
question
Signals
answer
convey information about the profitability of various markets
when firms make zero economic profit, the market is in long-run equilibrium
when firms make zero economic profit, the market is in long-run equilibrium
question
What happens if existing firms are earning positive or negative profits?
answer
Positive
Quantity increases -> price goes down -> profit foes down-> firm entry stops when profit=0
Negative:
Quantity decreases -> price goes up-> profit goes up
Quantity increases -> price goes down -> profit foes down-> firm entry stops when profit=0
Negative:
Quantity decreases -> price goes up-> profit goes up
question
How to identify the most profitable output on a graph
answer
1. Locate the point at which the firm maximize its profit (MR=MC)
2. Look for the profit-maximizing output on the x-axis
Profit = (price-ATC (along the dashed line at Q))(Q)
2. Look for the profit-maximizing output on the x-axis
Profit = (price-ATC (along the dashed line at Q))(Q)
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