Microeconomics Ch 9 - Custom Scholars
Home » Flash Cards » Microeconomics Ch 9

# Microeconomics Ch 9

question
Perfect Competition

(NEED TO KNOW)
a theory of market structure based on four assumptions: 1) there are many sellers and buyers, 2) sellers sell a homogeneous good, 3) buyers and sellers have all relevant information, 4) entry into or exit from the market is easy
question
Price Taker
a seller that does not have the ability to control the price of the product it sells; the seller takes the price determined in the market
a perfectly competitive firm
can increase or decrease output without significantly affecting the price of the product
question
Why is a Perfectly Competitive Firm a Price Taker?
a firm is restrained from being anything but a price taker if it finds itself one among many firms where its supply is small relative to the total market supply (assumption 1 in the theory of perfect competition), and it sells a homogeneous product (assumption 2) in an environment where buyers and sellers have all relevant information (assumption 3)
question
The Demand Curve for a Perfectly Competitive Firm
horizontal (flat, perfectly elastic) demand curve at the equilibrium price, in short, the firm takes the equilibrium price as given, hence the firm is a price taker and sells at all quantities of output at this price
question
Why Does a Perfectly Competitive Firm Sell at Equilibrium Price
the reasons are that the firm sells a homogeneous product, its supply is small relative to the total market supply, and all buyers are informed about where they can obtain the product at the lower price
question
Marginal Revenue (MR)
the change in total revenue (TR) that results from selling one additional unit of output (Q)

for a perfectly competitive firm marginal revenue is the same as price

MR = (change in TR)/(change in Q)
question
Marginal Revenue for a Perfectly Competitive Firm
the marginal revenue curve for the perfectly competitive firm is the same as its demand curve
a demand curve plots price against quantity, whereas a marginal revenue curve plots marginal revenue against quantity; if price equals marginal revenue, then the demand curve and marginal revenue curve are the same

demand curve = marginal revenue curve
question
Profit Maximization Rule
profit is maximized by producing the quantity of output at which MR = MC
question
For the Perfectly Competitive Firm the Profit Maximization Rule
can be written as P = MC because for the perfectly competitive firm, P = MR
in perfect competition, profit is maximized when: P = MR = MC

producing a good-any good-until price equals marginal cost ensures that all units of the good are produced that are of greater value to buyers than the alternative goods that might have been produced
question
For the Perfectly Competitive Firm, if Price if Above the Average Total Cost
the firm maximizes profits by producing the quantity of output at which MR = MC
question
If Price is Below the Average Variable Cost, the Perfectly Competitive Firm
minimizes losses by choosing to shut down-that is, by not producing
question
If the Price is Below Average Total Cost but Above Average Variable Cost, the Perfectly Competitive Firm
minimizes its losses by continuing to product in the short run instead of shutting down
question
Shutdown Decision
P > AVC = firm produces
P < AVC = firm shuts down
TR > TVC = firm produces
TR < TVC = firm shuts down
question
Short Run (Firm) Supply Curve
the portion of the firm's marginal cost curve that lies above the average variable cost curve
question
Short Run Market (Industry) Supply Curve
the horizontal addition of all existing firm's short run supply curves
this market curve is used along with the market demand curves to determine equilibrium price and quantity
because of the law of diminishing marginal returns, MC curves are upward sloping, and because MC curves are upward sloping, so are market supply curves
question
Long Run Competitive Equilibrium
the condition where P = MC = SRATC = LRATC
economic profit is zero, firms are producing the quantity of output at which price is equal to marginal cost, and no firm has an incentive to change its plant size

1) economic profit is zero: price is equal to short run average total cost
2) firms are producing the quantity of output at which price is equal to marginal cost
3) no firm has an incentive to change its plant size to produce its current output; that is, at the quantity of output at which P = MC, the following condition holds: SRATC = LRATC
question
Long Run Competitive Equilibrium Exists Where There is no Incentive for Firms to:
1) enter or exit the industry
2) produce more or less output
3) change plant sizes
question
Industry Adjustment to an Increase in Demand
1) we start at long run competitive equilibrium, where P = MC = SRATC = LRATC
2) then market demand rises for the product produced by the firms in the industry, and the equilibrium price rises
3) as a consequence, the demand curve faced by an individual firm (which is its marginal revenue curve) shifts upward
4) next, existing firms in the industry increase the quantity of output because marginal revenue now intersects marginal cost at a higher quantity of output
5) in the long run, new firms begin to enter the industry because price is currently above average total cost, and there are positive economic profits
6) as new firms enter the industry, the market (industry) supply curve shifts rightward
7-8) as a consequence, equilibrium price falls until long run competitive equilibrium is reestablished-that is, until once again economic profit is zero

price increased in the short run (owing to the increase in demand) and then decreased in the long run (owing to the increase in supply), profits increased (owing to the increase in demand and consequent increase in price) and then decreased (owing to the increase in supply and consequent decrease in price)
question
Long Run (Industry) Supply (LRS) Curve
graphic representation of the quantities of output that the industry is prepared to supply at different prices after the entry and exit of firms are completed
question
Constant Cost Industry
an industry in which average total costs do not change as (industry) output increases or decreases when firms enter or exit the industry, respectively
characterized by a horizontal long run supply curve (because the cost of production has stayed constant so then then the price stays constant)
question
Increasing Cost Industry
an industry in which average total costs increase as output increases and decrease as output decreases when firms enter and exit the industry respectively
characterized by an upward sloping long run supply curve
supply increases less than demand, because the demand increase causes in increase in the cost of production
in reverse, you will have a lower price than what you started from
question
Decreasing Cost Industry
an industry in which average total costs decrease as output decreases when firms enter and exit the industry, respectively
characterized by a downward sloping long run supply curve
supply increases more than demand, because costs of producing have gotten efficient because of the demand increase, which forces a huge increase in supply
in reverse you will have a higher price than what you started from
question
Will the Perfectly Competitive Firm Advertise
advertising has all cost and not benefits, however, a perfectly competitive industry might advertise
question
Industry Adjustment to a Decrease in Demand
The analysis outlined for an increase in demand can be reversed to explain industry adjustment to a decrease in demand. If demand falls, equilibrium price will fall, shifting the individual firm's demand curve down. Existing firms will decrease output, since P = MC is now at a lower level of output (since P has decreased). As a result, existing firms will suffer losses in the short run. Over time, firms will exit the industry until losses "dry up." This will, in turn, shift the industry supply curve leftward, raising equilibrium price. Exit will continue until long-run competitive equilibrium (specifically, zero economic profit) is re-established.
1 of 24
question
Perfect Competition

(NEED TO KNOW)
a theory of market structure based on four assumptions: 1) there are many sellers and buyers, 2) sellers sell a homogeneous good, 3) buyers and sellers have all relevant information, 4) entry into or exit from the market is easy
question
Price Taker
a seller that does not have the ability to control the price of the product it sells; the seller takes the price determined in the market
a perfectly competitive firm
can increase or decrease output without significantly affecting the price of the product
question
Why is a Perfectly Competitive Firm a Price Taker?
a firm is restrained from being anything but a price taker if it finds itself one among many firms where its supply is small relative to the total market supply (assumption 1 in the theory of perfect competition), and it sells a homogeneous product (assumption 2) in an environment where buyers and sellers have all relevant information (assumption 3)
question
The Demand Curve for a Perfectly Competitive Firm
horizontal (flat, perfectly elastic) demand curve at the equilibrium price, in short, the firm takes the equilibrium price as given, hence the firm is a price taker and sells at all quantities of output at this price
question
Why Does a Perfectly Competitive Firm Sell at Equilibrium Price
the reasons are that the firm sells a homogeneous product, its supply is small relative to the total market supply, and all buyers are informed about where they can obtain the product at the lower price
question
Marginal Revenue (MR)
the change in total revenue (TR) that results from selling one additional unit of output (Q)

for a perfectly competitive firm marginal revenue is the same as price

MR = (change in TR)/(change in Q)
question
Marginal Revenue for a Perfectly Competitive Firm
the marginal revenue curve for the perfectly competitive firm is the same as its demand curve
a demand curve plots price against quantity, whereas a marginal revenue curve plots marginal revenue against quantity; if price equals marginal revenue, then the demand curve and marginal revenue curve are the same

demand curve = marginal revenue curve
question
Profit Maximization Rule
profit is maximized by producing the quantity of output at which MR = MC
question
For the Perfectly Competitive Firm the Profit Maximization Rule
can be written as P = MC because for the perfectly competitive firm, P = MR
in perfect competition, profit is maximized when: P = MR = MC

producing a good-any good-until price equals marginal cost ensures that all units of the good are produced that are of greater value to buyers than the alternative goods that might have been produced
question
For the Perfectly Competitive Firm, if Price if Above the Average Total Cost
the firm maximizes profits by producing the quantity of output at which MR = MC
question
If Price is Below the Average Variable Cost, the Perfectly Competitive Firm
minimizes losses by choosing to shut down-that is, by not producing
question
If the Price is Below Average Total Cost but Above Average Variable Cost, the Perfectly Competitive Firm
minimizes its losses by continuing to product in the short run instead of shutting down
question
Shutdown Decision
P > AVC = firm produces
P < AVC = firm shuts down
TR > TVC = firm produces
TR < TVC = firm shuts down
question
Short Run (Firm) Supply Curve
the portion of the firm's marginal cost curve that lies above the average variable cost curve
question
Short Run Market (Industry) Supply Curve
the horizontal addition of all existing firm's short run supply curves
this market curve is used along with the market demand curves to determine equilibrium price and quantity
because of the law of diminishing marginal returns, MC curves are upward sloping, and because MC curves are upward sloping, so are market supply curves
question
Long Run Competitive Equilibrium
the condition where P = MC = SRATC = LRATC
economic profit is zero, firms are producing the quantity of output at which price is equal to marginal cost, and no firm has an incentive to change its plant size

1) economic profit is zero: price is equal to short run average total cost
2) firms are producing the quantity of output at which price is equal to marginal cost
3) no firm has an incentive to change its plant size to produce its current output; that is, at the quantity of output at which P = MC, the following condition holds: SRATC = LRATC
question
Long Run Competitive Equilibrium Exists Where There is no Incentive for Firms to:
1) enter or exit the industry
2) produce more or less output
3) change plant sizes
question
Industry Adjustment to an Increase in Demand
1) we start at long run competitive equilibrium, where P = MC = SRATC = LRATC
2) then market demand rises for the product produced by the firms in the industry, and the equilibrium price rises
3) as a consequence, the demand curve faced by an individual firm (which is its marginal revenue curve) shifts upward
4) next, existing firms in the industry increase the quantity of output because marginal revenue now intersects marginal cost at a higher quantity of output
5) in the long run, new firms begin to enter the industry because price is currently above average total cost, and there are positive economic profits
6) as new firms enter the industry, the market (industry) supply curve shifts rightward
7-8) as a consequence, equilibrium price falls until long run competitive equilibrium is reestablished-that is, until once again economic profit is zero

price increased in the short run (owing to the increase in demand) and then decreased in the long run (owing to the increase in supply), profits increased (owing to the increase in demand and consequent increase in price) and then decreased (owing to the increase in supply and consequent decrease in price)
question
Long Run (Industry) Supply (LRS) Curve
graphic representation of the quantities of output that the industry is prepared to supply at different prices after the entry and exit of firms are completed
question
Constant Cost Industry
an industry in which average total costs do not change as (industry) output increases or decreases when firms enter or exit the industry, respectively
characterized by a horizontal long run supply curve (because the cost of production has stayed constant so then then the price stays constant)
question
Increasing Cost Industry
an industry in which average total costs increase as output increases and decrease as output decreases when firms enter and exit the industry respectively
characterized by an upward sloping long run supply curve
supply increases less than demand, because the demand increase causes in increase in the cost of production
in reverse, you will have a lower price than what you started from
question
Decreasing Cost Industry
an industry in which average total costs decrease as output decreases when firms enter and exit the industry, respectively
characterized by a downward sloping long run supply curve
supply increases more than demand, because costs of producing have gotten efficient because of the demand increase, which forces a huge increase in supply
in reverse you will have a higher price than what you started from
question
Will the Perfectly Competitive Firm Advertise
advertising has all cost and not benefits, however, a perfectly competitive industry might advertise
question
Industry Adjustment to a Decrease in Demand
The analysis outlined for an increase in demand can be reversed to explain industry adjustment to a decrease in demand. If demand falls, equilibrium price will fall, shifting the individual firm's demand curve down. Existing firms will decrease output, since P = MC is now at a lower level of output (since P has decreased). As a result, existing firms will suffer losses in the short run. Over time, firms will exit the industry until losses "dry up." This will, in turn, shift the industry supply curve leftward, raising equilibrium price. Exit will continue until long-run competitive equilibrium (specifically, zero economic profit) is re-established.

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Number of pages
Urgency
Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

## Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.