PERFECT COMPETITION CHAPTER 8

PERFECT COMPETITION CHAPTER 8

1. MARKET STRUCTURE; Important features of a market, such as the number of firms, product uniformity across firms, firm's ease of entry and exit and forms of competition.

2. PERFECT COMPETITION; A market structure with many fully inform buyers and sellers of a standardized product and no obstacles to entry or exit of firms in the long run.

   • COMMODITY; A standardized product, a product that does not differ across producers, such as a bushel of wheat or an once of gold.
   • PRICE TAKER; A firm that faces a given market price and whose quantity supplied has no effect in that price; a perfectly competitive firm that decides to produce most accept, or "take" the market price.

3. MARGINAL REVENUE (MR); the firm's change in total revenue from selling an additional unit; a perfectly competitive firm's marginal revenue is also the market price

   • GOLDEN RULE OF PROFIT MAXIMIZATION; to maximize profit or minimize loss, a firm should produce the quantity at which marginal revenue equal marginal cost; this rule holds for all market structures.
     • AVERAGE REVENUE (AV); total revenue divided by quantity; or AR= TR/q; in all market structure, average revenue equals the market price.

4. SHORT RUN FIRM SUPPLY CURVE; A curve that shows how much a firm supply at each price in the short run; in the perfect competition, that portion of firm's marginal cost curve that intersects and rises above the low point on its average variable cost curve.

   • SHORT RUN INDUSTRY SUPPLY CURVE; a curve that indicates the quantity supply by the industry at each price in the short run; in perfect competition, the horizontal some of each firm's short run supply curve.
     • LONG RUN INDUSTRY SUPPLY CURVE; a curve that shows the relationship between price and the quantity supplied by the industry once firms adjust in the long run to any change in the market demand.
       • CONSTANT COST INDUSTRY; 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.
         • INCREASING-COST INDUSTRY; an industry that faces higher per-unit production cost industry output expands in the long run;the long-run industry supply curve slopes upward.
   • SHUT DOWN (TOTAL LOSS); when both the ATC and AVC curve surpasses the firms equilibrium and a firm is at a complit loss.
   • PROFIT; profit is made in the firms equilibrium or the intrsection between marginal cos and marginal revenue is greater than both the average total cost (ATC) and the average variable cost (AVC) curves.
   • INCUR A LOSS; the condition when the firm equilibrium is greater than the AVC curve but less than the ATC curve. the firm should keep producing since it has payed the sunk cost and may stay partially pay for the variable cost.
   • BREAK EVEN; point where the firm equilibrium point intersects with the lowest point of the ATC curve, there is not loss or profit.

5. PRODUCTIVE EFFICIENCY; the condition that exist when production uses the least-cost combination of inputs; minimum average cost in the long run.

   • ALLOCATIVE EFFICIENCY; the condition that exist when firms produce the output most preferred by consumers; marginal benefit equal marginal cost.
     • PRODUCERS SURPLUS; a bonus for producers in the short run; the amount by which total revenue from production exceeds variable cost.
   • SOCIAL WELFARE; the overall well-being of people in the economy; maximized when the marginal cost of production equals the marginal benefit to consumers.

6. PERFECT COPETITION IN THE LONG RUN; Timeframe when all cost arre variable and the average economic profit is zero due to firms entering and exiting the industry.

   • CONSTANT COST INDUSTRY; an industry that may expand o contractwithput changing the average price per unit.
   • INCREASING COST INDUSTRY; industry where the increase in output leads to an increase in the average cost pper unit.
   • CONSUMER SURPLUS; the difference between what what consumers are willing to pay and the actual market price.