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Perfect Competition
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Many buyers and sellers
The goods offered are identical
Firms can freely enter or exit the market
The goods offered are identical
Firms can freely enter or exit the market
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Price Taker
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Market determines the price of all firms because of large number of buyers/sellers, and ease of entry to market
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Allocative Efficiency
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where P=MC and production will be allocated to reflect consumer preferences
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Profit Equation
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Total Revenue-Total Cost
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Total Revenue Equation
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Price x Quantity
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Marginal Revenue
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The additional revenue from selling an additional unit
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Marginal Cost Equation
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change in TC/change in Q
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In a competitive firm, produce quantity where...
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MR=MC
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What is the competitive's firm supply curve?
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Same as the Marginal Cost Curve
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A firm has profits when...
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P>ATC
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A firm has losses when...
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P<ATC
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A firm should shut down in the short run if ____
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P<AVC
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If a firm shuts down they will still pay
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Fixed costs
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A short-run decision not to produce anything because of market conditions
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Shutdown
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A key difference between costs in the short run and costs in the long run:
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SR- some costs are variable and some fixed
LR- ALL costs are variable
LR- ALL costs are variable
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Why might new firms enter the market?
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Potential for profit
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When will new firms STOP entering the market?
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When all firms have 0 economic profit
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3 things that occur in the long run in competitive markets
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1) Produce quantity where: P=MR=MC=Min ATC=Efficient scale
2) All firms have 0 economic profit
3) Demand curve is horizontal at the market price
2) All firms have 0 economic profit
3) Demand curve is horizontal at the market price
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Monopoly
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A firm that is the sole seller of a product without close substitutes
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Market Power
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A firm's ability to influence the market price of a product it sells, Price Maker
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High Barriers to entry
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Other firms cannot enter the market, True of monopolies and oligopolies
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Legal barriers to entry
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patents and copyrights
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Competitive firm demand curve
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Horizontal: perfectly elastic
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Monopoly firm demand curve
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Downward sloping
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In a monopoly, MR is ..... D
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Less Than
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Profit maximization rule for monopolists
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Quantity at MR=MC, P is greater than MR=MC
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Monopolistic Competition
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Combines characteristics of perfect competition and monopoly.
Many firms/sellers
Differentiated products
Many firms/sellers
Differentiated products
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Oligopoly
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Few firms/sellers
Identical or similar products
Firms are Interdependent
Sells less Q than PC but more than monopoly
Identical or similar products
Firms are Interdependent
Sells less Q than PC but more than monopoly
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Collusion
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An agreement among firms in a market to limit quantities or prices
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Cartel
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A group of firms (oligopoly) acting in unison and making an agreement to limit competition and act like a monopoly
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Game Theory
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Helps us understand oligopoly and other situations where "players" interact and behave strategically
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Nash Equilibrium
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A situation in which economic participants interacting with one another each choose their best strategy given the strategies that all the others have chosen
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