Term
| What is meant by Perfect Competition? |
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Definition
- Maximum Efficiency
- Desires state for all markets |
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Term
| Characteristics of Competitive Markets |
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Definition
1. Large number of buyers and sellers
2. Individual buyers and sellers are “small” compared to the market
3. The good being sold is “homogeneous" or identical, cannot tell where it came from
4. Information is easily available so everyone has the same amount of knowledge about the market
5. Hence each individual buyer/seller does NOT have market power
6. EACH INDIVIDUAL FIRM TAKES THE MARKET PRICE AS GIVEN AND THEN DECIDES HOW TO MUCH TO BUY OR SELL |
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Term
| How do rational decision-makers respond to prices? |
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Definition
- For our purposes, we will treat all buyers and all sellers as price takers
- When I go to Countdown, I cannot negotiate the price I pay for apples
- When a dairy farmer sells her milk to Fonterra, she cannot negotiate the price she receives
- Such decision-makers can only respond to prices; they have no power (individually) to influence prices |
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Term
| Demand curve facing an INDIVIDUAL SELLER example |
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Definition
[image]
- Only HORIZONTAL for an individual firm
- Individual has to take the market price (has no other choice)
- The individual firm can supply as much as it wants at that price
- Elasticity of demand is INFINITE, which means that if individual tries to sell anywhere above the market price, it will not sell |
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Term
| Profit maximisation in the Short Run - Given the price and the firm’s costs each firm has only ONE decision: |
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Definition
How much output to produce?
Objective is to maximise profit |
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Term
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Definition
| Profit = TR - TC(including opportunity costs) |
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Term
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Definition
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Term
| What does the economic cost include? |
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Definition
| A "normal rate of return" on capital |
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Term
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Definition
When a firm is earning zero economic profit (including opportunity costs)
Revenue = TC |
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Term
| What does Marginal Revenue mean? |
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Definition
| defined as the extra revenue that the seller gets when he produces and sells an extra unit of output. |
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Term
| Marginal Revenue in a horizontal demand curve |
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Definition
- The price the seller gets is constant
- Therefore, every extra unit they sell, they get exactly the same amount extra from the unit before
P x Q = P x 1 |
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Term
| Marginal Revenue equation |
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Definition
MR = Change in TR / Change in Q
P=MR=AR=D (only when D-curve is horizontal) |
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Term
| How can Profit Maximisation be found? |
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Definition
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Term
Example, should this firm expand output from Q1 to Q2?
[image] |
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Definition
YES.
Because MR > MC
[image]
Suppose P* = $10.00
Say MC between Q1 and Q2 is $3.00
Then if you increase output from Q1 to Q2, you earn extra profit of $7.00
- ALWAYS SELL WHEN MR IS GREATER THAN MC |
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Term
| Profit Maximising Condition |
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Definition
[image]
Keep increasing output until MR = MC (or P=MC in this case)
- After that MR |
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Term
| Firm Making Short Run Profit Example |
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Definition
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Term
| Firm at BREAKEVEN in the Long Run |
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Definition
[image]
- Break even also known as "Normal Rate of Return" |
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Term
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Definition
This is the PROFIT MAXIMISING Position
- It is the best a firm can do
- It can also be a LOSS MINIMISING position, as it is the best a firm can do without making a loss |
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Term
| Firm Making a Loss in the Short Run |
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Definition
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Term
| Making a Short-Run Shut Down Decision |
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Definition
Must pay its fixed costs so if they supply more can they reduce this loss?
- Depends on whether the firm is covering its Variable Costs: If they do, then keep going; if they don't then shut down
- A new curve of AVC is introduced to work this out |
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Term
| Making a Short-Run Shut Down Decision Diagram examples |
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Definition
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