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perfect competition
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the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product
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Monopoly
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A market in which there are many buyers but only one seller.
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Oligopoly
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A market structure in which a few large firms dominate a market
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monopolistic competition
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a market structure in which many companies sell products that are similar but not identical
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marginal revenue
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the additional income from selling one more unit of a good; equal to price in perfect competition
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MR = MC rule
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The principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.
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Shutdown Rule (short run)
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P<AVC
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MR. DARP
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In a perfectly competitive market:
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Marginal Revenue = Demand = Average Revenue = Price
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...
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Entry Barriers
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obstacles that determine how easily a firm can enter an industry and often significantly predict industry profit potential
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standardized product
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a product that consumers consider identical in all essential features to other products in the same market
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Price-takers are individuals in a market who:
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have no ability to affect the price of a good in a market.
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perfectly elastic demand curve
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a horizontal line reflecting a situation in which any price increase reduces quantity demanded to zero; the elasticity has an absolute value of infinity
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Industry short run supply curve
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Aggregate of all individual firm's MC curve above the AVC curve
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total revenue
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Price x Quantity
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Profit Maximizing Rule
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All firms maximize profit by producing where MR = MC
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What is profit?
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TR-TC
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Economic Profit
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TR-EC-IC
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Accounting Profit
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TR-EC
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What are explicit costs?
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Costs out of pocket
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What are implicit costs?
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Costs that do not require money spending. (Time, Opportunity Cost), what you could've earned
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Total Fixed Cost (TFC)
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Costs that do not vary as output varies and that must be paid even if output is zero. These are payments that the firm must make in the short run, regardless of the level of output.
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TFC Equation
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TFC = TC - TVC or TFC=Q x AFC
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Total Variable Cost (TVC)
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the total of all costs that vary with output in the short run
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TVC Equation
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TVC = TC - TFC or TVC=Q x AFC
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Total Cost (TC)
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TC=TFC + TVC or TC=Q x ATC
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Average Fixed Cost (AFC)
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AFC = TFC/Q AFC always falls as Q rises
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Average Variable Cost (AVC)
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AVC=TVC/Q AVC falls at first, and then rises as Q increases
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Average Total Cost (ATC)
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ATC=TC/Q or ATC=AFC+AFC ATC falls at first, and then rises as Q increases
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Marginal Cost (MC)
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The change in the firm's TC when it produces one more unit of output. Falls at first, and then rises as Q increases
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Marginal Cost Equation
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MC=ΔTC/ΔQ or MC=ΔTVC/ΔQ since TFC doesn't change
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Short Run
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Fixed plant size(stuck with what they have currently), ex. location, length depends on industry
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Long Run
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all factors of production can be varied, including plant capacity, time period is long enough for firms to enter and leave the industry
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Economies of Scale
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Long run ATC FALLS as Q increases (AFC and AVC are decreasing)
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Diseconomies of Scale
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long-run ATC rises as the quantity of output increases
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Constant Returns Scale
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Long run ATC DOES NOT VARY with the Q of output
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Marginal Product
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the increase in output that arises from an additional unit of input (slope of pf)
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Law of Diminishing Marginal Returns
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As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
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total product
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total output produced by the firm
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average product
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the average amount produced by each unit of a variable factor of production
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long-run supply curve
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a schedule or curve showing the prices at which a purely competitive industry will make various quantities of the product available in the long run
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constant cost industry
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an industry that can expand or contract without affecting the long run per-unit cost of production; the long-run industry supply curve is horizontal
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increasing cost industry
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an industry that faces higher per-unit production costs as industry output expands in the long run; the long run industry supply curve slopes upward
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Long Run Equilibrium in Perfect Competition
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The firm produces at the minimum point of its average total cost curves and where MR = MC earning zero economic profit.
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