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Market Structure
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refers to all the features that may affect the behavior and performance of the firms in a market, such as the number of firms or the type of product they sell
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Market Power
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when firms can influence the price of their product
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Competitiveness of the Market
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the degree to which individual firms lack such market power . The more market power the firms have, the less competitive the market is
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Perfectly competitive market
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Extreme form of competitive market structure. when each firm has zero market power. Here, firms must accept the pierce set by the forces of demand and supply. No need for individual firms to compete because no one has control
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Competitive behavior
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the degree to which individual firms actively vie with one another for business
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The assumptions of perfect competition
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Firm sell a homogeneous product, Consumers know the characteristics of the product being sold and the prices charged by various firms, The level of each firm's output at which its LRAC curve reaches a minimum is small relative to the industry's total output, freedom of entry and exit, There is perfect information
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Price taker
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the firm can alter its output and sales without affecting the market price of its product
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Demand curve for a perfectly competitive firm
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horizontal at equillibirum
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Demand curve for a perfectly competitive industry
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negative downward sloping
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Why is the Demand curve for a perfectly competitive firm horizontal? because of the price taker assumption
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...
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Total Revenue
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is the total amount received by the firm from the sale of a product.
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Total Revenue Formula
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TR=p(Q)
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Average Revenue
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is the amount of revenue per unit sold. It is equal to total revenue divided by the number of units sold and is thus equal to the price at which the product is sold
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Formula for Average Revenue
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TR/Q = (pQ)/Q=p
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Marginal Revenue
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the change in a firm's total revenue resulting from a change in its sales by one unit.
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Formula for marginal revenue
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𝝙TR/𝝙Q
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Whenever output changes by more than one unit (for marginal revenue)...
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the change in revenue must be divided by the change in output to calculate the approximate marginal revenue
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When the firm is a price taker, the formula is
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AR=MR=p
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Profit maximization formula
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MR=MC
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Optimal Amount
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quantity where MR = MC
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Total Cost
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Average Cost x Quantity
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Where are Profits? The part in the revenue rectangle that is above the cost region and below the demand curve
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...
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Formula for profits
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Pi=(P-AC)Q
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Profits are positive if...
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profit per unit is positive/Pi>0 IF P>AC
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Break-even point
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pi=0 if P = AC
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What is all equal in perfect competition?
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if you're maximizing profit, then P=MR=MC=AC
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Shutdown point
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The lowest price at which the firm can just cover its average variable cost, and so is indifferent between producing and not producing
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What happens on Black Thursday/Friday
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where retailers go from being in the red (Losing money) to being in the black (making money) .
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In the short run, what happens if the firm produces nothing?
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If a firm produces nothing, it will have an operating loss that is equal to its fixed costs
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In the short run, what happens if the firm decided to produce?
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If it decides to produce, it will add the variable cost of product to its costs and the recipients from the sale of its product to its revenue
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When will the firm actually lose money by producing?
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If a firms revenue is less than its variable cost at every level of output, the firm will actually lose more by producing than by not producing at all.
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Rule 1 of short-run decisions
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A firm should not produce at all if, for all levels of output, total revenue (TR) is less than total variable cost (TVC). Equivalently, the firm should not produce at all if, for all levels of output, the market price (p) is less than average variable cost (AVC)
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Shut-down price
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The lowest price at which the firm can just cover its average variable cost, and so is indifferent between producing and not producing
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Rule 2 for short-run decisions
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Rule 2: If it is worthwhile for the firm to produce at all, the profit-maximizing firm should produce the output at which marginal revenue equals marginal cost.
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If Prices are below average variable cost
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the firm will supply zero units
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If Prices are above the minimum or average variable cost
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the competitive firm will choose its level of output to equate price and marginal cost
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Where is the supply curve for a competitive firm?
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The supply curve for a competitive firm is the position of its MC curve above the AVC curve.
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Short Run Equilibrium
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When a perfectly competitive industry is in short-run equilibrium, each firm is producing and selling a quantity for which its marginal cost equals the market price.
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Profit per unit formula
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p - ATC
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Formula for Firm's total profit (or loss) associated with the production of all Q units
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(p - ATC) x Q
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The key difference between perfectly competitive industry in the short run and in the long run is ...
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the entry or exit of firms
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There will be no incentive for firms to leave the industry if...
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they are just breaking even since they are doing as well as they could do and economic profits are zero.
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What type of shift does the entry of new firms into the industry cause?
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a rightward shift in the supply curve
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With an unchanged market demand curve, this right shift in the industry supply curve will... reduce the equilibrium price
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...
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After the supply curve shifts, In order to maximize profits, both new and old firms will have to...
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adjust their output to this new price
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When does the industry reach zero-profit equilibrium
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New firms will continue to enter and the equilibrium will continue to fall, until all the firms in the industry are just covering their total costs
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An Exit-Inducing Price
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If the market price falls below the minimum of average variable cost, the firm will produce no output. If the low price is expected to persist, the firm will likely exit the industry
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The rate at which firms leave unprofitable industries depends on...
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how quickly their capital becomes obsolete or becomes too costly to operate because of rising maintenance costs as it ages
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The long-run equilibrium of a competitive industry occurs when...
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firms are earning zero profits.
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Conditions for Long-Run Equillbirum
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Existing firms must be maximizing their profits, given their existing capital. Existing firms must not be suffering losses. Existing firms must not be earning profits. Existing firms must not be able to increase their profits by changing the size of their production facilities.
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What does it mean for a competitive firm to be producing at the minimum point on its LRAC curve?
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maximizing its long-run profits,
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As the market demand curve shifts to the left...
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the firm will decrease its output and suffer losses.
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break even formula
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Fixed costs / (price – variable costs)
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