question
What do we assume about profit maximization?
answer
Firms attempt to maximize profits
question
Profit=
answer
TR-TC
question
What is TR=?
answer
Price Quantity=PQ
question
TC=?
answer
Function of Quantity (Amount Purchased* Cost)
question
Marginal Revenue
answer
Change in Total Revenue (TR) Generated by selling an additional unit of output
question
Equation of Marginal Revenue:
answer
Change in Total Revenue/Change in Output
question
Definition of Marginal Cost
answer
The additional cost incurred by producing an additional unit of output
question
Equation of Marginal Cost
answer
Change in total cost/change in quantity of output
question
In order to continue to maximize profits, what should a firm do?
answer
Continue to produce as long as the additional revenue from an addition unit of output is greater than the additional cost from an additional unit of output
question
Using MR and MC, describe the profit maximizing condition
answer
-Keep producing as long as MR > MC
-Profits are maximized by producing the quantity at which the marginal cost of ht elast unit produced is equal to its marginal revenue
-Profits are maximized by producing the quantity at which the marginal cost of ht elast unit produced is equal to its marginal revenue
question
When do firms stop producing in the profit maximizing condition?
answer
When MR=MC
question
If TR> TC, what is the firm?
answer
Profitable
question
If TR=TC, then the firm
answer
The firm breaks even
question
If TR<TC, the firm __________
answer
incurs a loss
question
Firms should shutdown if: (Include both Long Run and Short Run)
answer
Long Run: TR<TC--Shutdown and exit the industry
Short Run= TR<VC
Short Run= TR<VC
question
Price Takers
answer
Takes market price as given. Has no individual impact on market price
question
A Price taking producer:
answer
Is a producer whose actions have no effect on the market price of the good it sells
question
A price taking consumer
answer
Is a consumer whose actions have no effect on the market price of the good he or she buys
question
A perfectly competitive market
answer
Is a market in which all market participants in price takers
question
A perfectly competitive industry
answer
Is an industry in which producers are price takers
question
What are two necessary conditions for perfect competitions?
answer
1) for an industry to be perfectly competitive, it must contain many producers none of whom have a large market share
2) An industry can be perfectly competitive only if consumers regard the products of all producers as equivalent
2) An industry can be perfectly competitive only if consumers regard the products of all producers as equivalent
question
What is a homogeneous product
answer
Consumers regard the product of different producers as the same good
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What is free entry and exit?
answer
New producers can easily enter into or leave that industry
question
What does free entry and exit ensure:
answer
-The number of producers in an industry can adjust to changing market conditions
-Producers in an industry cannot artificially keep other firms out
-Producers in an industry cannot artificially keep other firms out
question
Under perfect competition, what is Price equal to?
answer
Marginal Revenue.
question
What does the marginal revenue curve show?
answer
How marginal revenue varies as output varies
question
What is the definition of Average Revenue?
answer
Revenue per unit of output
question
What is the equation for Average Revenue?
answer
AR= TR/Q= (P*Q)/Q=P
-Average Revenue=Price
-Average Revenue=Price
question
Under perfect competition, relate MR, AR, and P
answer
MR=AR=P
question
A price taking firm's profit is maximized by producing the:
answer
Quantity of output at which the marginal cost of the last unit produced is equal to the market price
question
On a graph, where is the profit maximizing point?
answer
Where MC crosses the MR Curve
question
Talk about the production decision of perfectly competitive markets in the short run:
answer
Produce quantity where Price (MR)=Marginal Cost (MC)
=Profit maximizing condition for perfectly competitive firm => P=MC
=Profit maximizing condition for perfectly competitive firm => P=MC
question
When would perfectly competitive firms shut down in the short run?
answer
Shutdown if Price < Average Variable Cost
-Fixed inputs cannot be changed in the short run
-Fixed inputs cannot be changed in the short run
question
How do you calculate profits in the short run?
answer
(P-ATC)*Q
question
If IN THE SHORT RUN if P> ATC, then what is the firm?
answer
Profitable
question
If IN THE SHORT RUN P=ATC, then the firm
answer
breaks even
question
If IN THE SHORT RUN P<ATC
answer
The firm incurs a loss
question
Firms should shut down if (in the short run):
answer
P< Minimum ATC
question
What is the profit Maximizing level of output?
answer
Where MR=P=MC
question
Talk about production decision in perfectly competitive markets in the long run
answer
-Produce quantity where Price(MR)=Marginal Cost (MC)
question
Talk about Shut down decision in the long run
answer
-All costs are avoidable in the long run
-Shutdown and exit the industry of Price < Average Total Cost
-Shutdown and exit the industry of Price < Average Total Cost
question
In the long run, how much profits does a perfectly competitive firm earn?
answer
None
question
In the long run, if Profits > O, the what will happen?
answer
Other firms will enter the market, Leads to an increase in supply, puts downward pressure on prices, price falls toward ATC and reduces profits to breakeven
question
If Profits <0, in the long run, what will happen?
answer
Leads to decrease in supply, puts upward pressure on prices, price rises and profits are increased
question
When profits=0 in the long run, what happens?
answer
No incentive for firms to enter or exit
question
In the long run, talk about price:
answer
P=AC=MC
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