question
perfectly competitive market
answer
many buyers and sellers
identical products
easy market entry and exit
identical products
easy market entry and exit
question
perfectly competitive firms
answer
are called price takers because they must take the price given by the market because their influence on price is insignificant
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total revenue
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the product price times the quantity sold
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average revenue
answer
total revenue divided by the number of units sold
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marginal revenue
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the increase in total revenue resulting from a one-unit increase in sales
(price)
(price)
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profit-maximizing level of output
answer
a firm should always produce at the output where MR = MC
a firms profits equal its total revenues minus its total costs
you want to maximize the difference between total revenue and total cost
a firms profits equal its total revenues minus its total costs
you want to maximize the difference between total revenue and total cost
question
zero economic profits
answer
total revenue is equal to total cost at q (maximizing output)
(normal rate of return)
total costs include opportunity costs - owners are doing as well as they could elsewhere
(normal rate of return)
total costs include opportunity costs - owners are doing as well as they could elsewhere
question
variable costs
answer
costs that vary with output
*if a firm cannot cover its variable costs, it will have larger losses if it operates that if it shuts down
*if a firm cannot cover its variable costs, it will have larger losses if it operates that if it shuts down
question
if price is less than average variable cost
answer
the firm should shut down since it is losing even more than its fixed costs by continuing to operate
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if price is greater than average variable cost but less than average total cost
answer
the firm operates in the short run, but incurs a loss
*it is better to earn enough to cover variable costs and a portion of the fixed costs than to earn nothing at all
*it is better to earn enough to cover variable costs and a portion of the fixed costs than to earn nothing at all
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short-run supply curve
answer
the portion of the MC curve above the AVC curve
*shows the marginal cost of producing at any given output
*shows the marginal cost of producing at any given output
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short-run market supply curve
answer
the horizontal summation of the individual firm's supply curves in the market
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at positive economic profits
answer
more firms will enter or produce more and the supply will move to the right, driving price down
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economic losses will cause
answer
firms to leave the industry causing higher profits for those who remain
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only at zero economic profits
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will there be no tendency for firms to either enter or leave the industry
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long-run equilibrium for a competitive firm
answer
equilibrium is achieved when average total costs are minimized (at the lowest point on the curve), all firms earn zero economic profits, short run and long run total costs are equal
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constant-cost industry
answer
an industry where input prices (and cost curves) do not change as industry output changes
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increasing-cost industry
answer
an industry where input prices rise (and cost curves rise) as industry output rises
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decreasing-cost industry
answer
an industry where input prices fall (and cost curves fall) as industry output rises
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productive efficiency
answer
where a good or service is produced at the lowest possible cost
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allocative efficiency
answer
where P = MC, and production will be allocated to reflect consumer preferences
question
shutdown point
answer
when your marginal costs are below average variable costs
because at that point you're not even covering variable costs (costs to function), let alone any of your fixed costs
because at that point you're not even covering variable costs (costs to function), let alone any of your fixed costs
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