Term
| Market Structure characteristics |
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Definition
| -special emphasis placed on firms' level of competition present in that market |
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Term
| Level of competition relates to: |
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Definition
-# of firms
-similarity/difference of firms' products
-ease of market entry/exit |
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Term
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Definition
-perfect competition (most competitive)
-monopolistic competition
-oligopoly
-monopoly (least competitive) |
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Term
| Characteristics of Perfect Competition |
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Definition
-very large # of independent sellers
-homogeneous product
-easy market entry/exit |
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Term
| an example of perfect competition |
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Definition
| Corn farmers all sell the same product (buyers don't really prefer a certain brand over the other) |
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Term
| Characteristics of Monopolistic Competition |
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Definition
-large # of independent sellers
-differentiated product
-relatively easy market entry/exit |
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Term
| an example of monopolistic competition |
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Definition
| gas retailers, clothing brands, etc. |
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Term
| Characteristics of an Oligopoly |
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Definition
-few firms (may be independent or interdependent)
-homogeneous or differentiated product
-difficult market entry/exit |
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Term
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Definition
homogeneous product: aluminum/steel
differentiated product: car dealerships |
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Term
| Characteristics of a Monopoly |
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Definition
-one seller
-unique product (no close substitutes)
-absolute barrier to entry (no new firms may enter market) |
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Term
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Definition
| -landline telephone service/water service in a town |
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Term
| How does perfect competition arise? |
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Definition
-minimum efficient scale at a low output level
-homogeneous product (buyers don't care about the brand) |
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Term
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Definition
| a firm that cannot influence the price of the good/service it produces |
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Term
| how are perfectly competitive firms price takers? |
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Definition
| the individual perf. comp. firm is so small relative to the market and the product is identical to every other firm's product (this makes it a price taker) |
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Term
| Implication of Price-Taking in the Perf. Comp. Market |
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Definition
-individual sellers have no control over product price (price is set by market)
-arbitrage forces price to/near equality in all market segments
-For individual sellers, price is constant for all output levels, so demand is perceived as perfectly elastic to the perf. comp. seller |
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Term
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Definition
| the increase in total revenue generated by the production and sale of an additional unit of output |
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Term
| Marginal Revenue (MR) formula |
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Definition
MR= (change in Total Revenues)/ (change in quantity)
or MR= P*Q |
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Term
| Pricing Policy of the Perfectly Competitive Firm |
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Definition
-must sell (or choose not to sell) its output at the market price
-price is constant for all levels
MR=P for perf. comp. seller |
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Term
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Definition
| buying a good in a market where the product is low and reselling it in a market where its price is higher |
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Term
| The firm's output decision |
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Definition
(in the short run) the firm operates at an output level where profits are maximized or losses are minimized
Profits= TR - TC
or Profits= TR - (FC+VC)
if the firm shuts down, losses= FC |
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Term
| The firm will shut down (set output level to 0) when... |
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Definition
at all nonzero output levels, TR falls short of VC
TR |
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Term
| The firm will increase profits by increasing output as long as... |
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Definition
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Term
| The firm will stop increasing output when... |
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Definition
MR=MC
(it will only move into the output range where MR |
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Term
| The firm maximizes profits/minimizes losses at... |
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Definition
MR=MC
or P=MC (since P=MR for perf. comp. firm) |
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Term
| The firm will continue to operate in the short run when... |
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Definition
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Term
| Revenue per unit of output equals... |
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Definition
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Term
| Variable cost per unit of output equals... |
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Definition
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Term
| The perf. comp. firm will continue to operate in the short run as long as... |
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Definition
| P>AVC (the firm will shut down inf P |
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Term
| the perf. comp. firm will max profits/min losses at the output level where... |
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Definition
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Term
| How does a perf. comp. firm earn profit at points of the graph? |
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Definition
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Term
| When will a firm shut down in a perf. comp. market? |
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Definition
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Term
| The Perf. Comp. Firm's Short-run Supply Curve |
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Definition
-produces at output level where P=MC, as long as P>AVC so that its supply curve = its MC curve for prices >AVC
(the MC curve slopes upward because of the law of diminishing returns) |
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Term
| Why does the perf. comp. market supply curve slope upward? |
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Definition
because of the law of decreasing returns
-the supply curve is obtained by adding the MC curves of all the firms in that market |
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Term
| Conditions for short-run equilibrium |
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Definition
-no tendency for market price to change, so quantity demanded=quantity supplied
-the firm should have no reason to change its output level, so the firm operates at the output level where P=MC when P>AVC |
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Term
| Conditions for Long-run Equilibrium |
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Definition
-quantity demanded=quantity supplied at the market price
-the firm operates at the output level where P=MC (and P>AVC)
-the # of firms in the market should be stable (no tendency for firms to enter/exit market) so the typical firm earns zero economic profits (P=ATC) |
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Term
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Definition
| an industry in which production costs remain constant as output expands in the long-run |
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Term
| Adjustments to an Increase in Market Demand in the short run |
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Definition
-market price increases
-the typical firm's output level increases
-the typical firm's profit level increases |
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Term
| Adjustment to an increase in market demand in the long run |
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Definition
-economic profits attract additional firms into the market
-market supply increases
-price declines to the point where economic profits are eliminated |
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Term
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Definition
| a curve that connects points of long-run equilibrium in a perfectly competitive market |
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Term
| The LRS curve for a constant cost industry |
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Definition
| perfectly elastic (horizontal) |
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Term
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Definition
| industry in which costs increase as output expands in the long run |
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Term
| Adjustment to an increase in market demand (Increasing Cost Industry) in the short run |
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Definition
-market price increases
-the firm's output level and profits increase |
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Term
| Adjustment to an increase in market demand (Increasing Cost Industry) in the long run |
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Definition
-economic profits attract new firms into the market
-market supply increases
-price declines and ATC rises to the point where economic profits are eliminated
-the long run equilibrium price lies above the original equilibrium price |
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Term
| LRS curve for increasing cost industry |
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Definition
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Term
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Definition
| an industry in which production costs decrease as output increases in the long run |
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Term
| Adjustment to an increase in market demand (Decreasing Cost Industry) in the short run |
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Definition
-market price increases
-the firm's output level and the profit level increases |
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Term
| Adjustment to an increase in market demand (Decreasing Cost Industry) in the short run |
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Definition
-economic profits attract new firms in the market
-market supply increases
-price declines and ATC falls to the point where economic profits are eliminated
-the new long-run equilibrium price lies below the original equilibrium price |
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Term
| LRS curve- decreasing cost industry |
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Definition
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Term
| The things that make perfect competition "perfect" |
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Definition
-production efficiency: the perfectly competitive firm operates at the minimum point on its ATC curve at long-run equilibrium
-Allocative efficiency: the perfectly competitive firm maximizes profits/minimizes losses by producing at the output level where P=MC |
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