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Market Structures
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• Market Structures - A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry into and exit from the market.
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perfect competition
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• Perfect Competition - A market structure characterized by (1) a large number of small firms, (2) a homogeneous product, and (3) very easy entry into or exit from the market. Perfect competition is also referred to as pure competition. large number of small firms, homogenus product, very easzy to entry/exit
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large number of firms
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o Large Number of Small Firms - This condition is fulfilled when each firm in a market has no significant share of total output and, therefore, no ability to affect the product's price. Each firm acts independently, rather than coordinating decisions collectively.
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large number of sellers
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o The large-number-of-sellers condition is met when each firm is so small relative to the total market that no single firm can influence the market price.
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homogeneous product
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o Homogeneous Product - If a product is homogeneous, buyers are indifferent as to which seller's product they buy.
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very easy entry and exit
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o Very easy entry and exit - Perfect competition requires that resources be completely mobile to freely enter or exit a market.
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no barriers to entry
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No barriers to entry - A barrier to entry is any obstacle that makes it difficult for a new firm to enter a market. Barriers can be financial, technical, or government-imposed barriers, such as licenses, permits, and patents.
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the perfectly comeptitive firm as a price taker
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o The Perfectly Competitive Firm as a Price Taker
Price Taker - A seller that has no control over the price of the product it sells. When a firm is a perfectly competitive firm. Impossible for the the firm to have market power to affect market price. Perfectly elastic demand curve due to it taking the equilibrium price
Price Taker - A seller that has no control over the price of the product it sells. When a firm is a perfectly competitive firm. Impossible for the the firm to have market power to affect market price. Perfectly elastic demand curve due to it taking the equilibrium price
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short run profit maximization for a perfectly comeptitive firm
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• Short-Run Profit Maximization for a Perfectly Competitive Firm
o Only makes one decision, what quantity of output to produce that maximizes profit, total revenue-total cost is found to see the profit maximizing level.
o Only makes one decision, what quantity of output to produce that maximizes profit, total revenue-total cost is found to see the profit maximizing level.
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Marginal revenue equation
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o MR = change in total revenue / change in output
o In perfect competition, the firm's marginal revenue equals the price that the firm views as a horizontal demand curve.
o In perfect competition, the firm's marginal revenue equals the price that the firm views as a horizontal demand curve.
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o A perfectly competitive firm shutting down
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o A perfectly competitive firm shutting down - If the price is below the minimum point on the AVC curve, each unit produced would not cover the variable cost per unit; therefore, operating would increase losses. The firm is better off shutting down and producing zero output. While shut down, the firm might keep its factory, pay fixed costs, and hope for higher prices soon. If the firm does not believe market conditions will improve, it will avoid fixed costs by going out of business.
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short run supply curve under perfect competitiions avc and mc
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o If rates are above AVC, a place should not shut down
o Short run supply curves under perfect competition - the short run supply curve is the MC curve above its AVC curve, The firm's marginal cost curve above the minimum point on its average variable cost curve.
o Short run supply curves under perfect competition - the short run supply curve is the MC curve above its AVC curve, The firm's marginal cost curve above the minimum point on its average variable cost curve.
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o If there are economic profits
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o If there are economic profits, new firms enter the industry and shift the short-run industry supply curve to the right. This increase in short-run supply causes the price to fall until economic profits reach zero in the long run. On the other hand, if there are economic losses in an industry, existing firms leave, causing the short-run supply curve to shift to the left, and the price rises. This adjustment continues until economic losses are eliminated and economic profits equal zero in the long run.
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o LRPCE
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o LRPCE is P=MR=SRMC=SRATC=LRAC
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o You are considering building a Rent Your Own Storage Center. You are trying to decide whether to build 50 storage units at a total economic cost of $200,000, 100 storage units at a total economic cost of $300,000, or 200 storage units at a total economic cost of $700,000. If you wish to survive in the long run, which size will you choose?
o
o
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o In the long run, surviving firms will operate at the minimum of the long-run average cost curve. The average cost of 50 storage units is $4,000 ($200,000/50), the average cost of 100 storage units is $3,000 ($300,000/100), and the average cost of 200 storage units is $3,500 ($700,000/200). Of the three storage-unit quantities given, the one with the lowest average cost is closest to the minimum point on the LRAC curve. If you chose 100 storage units, YOU ARE CORRECT.
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Perfectlyh competitive industrys short run supply curve
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o perfectly competitive industry's short-run supply curve -The supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm's average variable cost curve.
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