micro ch #10,11 (pure competition)

Q: loss minimization

AVC < price < ATC - price covers variable cost and some of fixed cost

Q: shut down

price < AVC - loss equals fixed cost

Q: a competitive firm's short-run supply curve is the __________

portion of its MC curve that lies above its AVC curve

Q: long run decision making: assumptions

1. entry and exit is the only way to adjust industry supply 2. firms have identical costs 3. constant-cost industry

question

four market models

answer

pure (perfect) competition
monopolistic competition
oligopoly
pure monopoly

decreasing comp. from left to right:
pure comp -> mono comp -> oligopoly -> pure monopoly

question

pure competition

answer

1. very large number of firms
2. standardized product
3. firms are price takers / no control over price
4. very easy to enter
5. no non-price competition

ex. agriculture

question

individual firms' demand curve for pure competition

answer

- perfectly elastic
- horizontal line

- price = demand = MR

question

perfectly elastic

answer

- horizontal line
- increase price = zero demand
- decrease price = infinite demand

question

short run decision-making by individual firms

answer

1. TR-TC approach
- where economic profit is max. or economic loss is min.
- breakeven -> normal profit only

2. MR-MC approach
where MR=MC

question

scenarios of short run decision making

answer

profit maximization
loss minimization
shutdown

question

profit maximization

answer

max. profit when price > ATC

question

loss minimization

answer

AVC < price < ATC

- price covers variable cost and some of fixed cost

question

shut down

answer

price < AVC

- loss equals fixed cost

question

a competitive firm's short-run supply curve is the __________

answer

portion of its MC curve that lies above its AVC curve

question

long run decision making: assumptions

answer

1. entry and exit is the only way to adjust industry supply
2. firms have identical costs
3. constant-cost industry

question

constant cost industry

answer

entry and exit of firms do not affect resource prices or the individual firms' ATC curves

question

long run decision making

answer

- price = minimum ATC
- entry of firms eliminate profit
- exit of firms eliminate loss

question

productive efficiency

answer

p = minimum ATC

question

allocative efficiency

answer

p = MC

an allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.

1 of 15

question

four market models

answer

pure (perfect) competition
monopolistic competition
oligopoly
pure monopoly

decreasing comp. from left to right:
pure comp -> mono comp -> oligopoly -> pure monopoly

question

pure competition

answer

1. very large number of firms
2. standardized product
3. firms are price takers / no control over price
4. very easy to enter
5. no non-price competition

ex. agriculture

question

individual firms' demand curve for pure competition

answer

- perfectly elastic
- horizontal line

- price = demand = MR

question

perfectly elastic

answer

- horizontal line
- increase price = zero demand
- decrease price = infinite demand

question

short run decision-making by individual firms

answer

1. TR-TC approach
- where economic profit is max. or economic loss is min.
- breakeven -> normal profit only

2. MR-MC approach
where MR=MC

question

scenarios of short run decision making

answer

profit maximization
loss minimization
shutdown

question

profit maximization

answer

max. profit when price > ATC

question

loss minimization

answer

AVC < price < ATC

- price covers variable cost and some of fixed cost

question

shut down

answer

price < AVC

- loss equals fixed cost

question

a competitive firm's short-run supply curve is the __________

answer

portion of its MC curve that lies above its AVC curve

question

long run decision making: assumptions

answer

1. entry and exit is the only way to adjust industry supply
2. firms have identical costs
3. constant-cost industry

question

constant cost industry

answer

entry and exit of firms do not affect resource prices or the individual firms' ATC curves

question

long run decision making

answer

- price = minimum ATC
- entry of firms eliminate profit
- exit of firms eliminate loss

question

productive efficiency

answer

p = minimum ATC

question

allocative efficiency

answer

p = MC

an allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.

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micro ch #10,11 (pure competition)

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