What’s perfect competition? (4)
perfect competition
- many independent and small producers and consumers
- make the same product
- no barriers to entry or exit
- firms are PRICE TAKERS
what’s a price taker?
a price taker accepts the market price and produces as much as they want at that price
What’s the demand curve like for each perfectly competitive firm?
the demand curve is PERFECTLY ELASTIC
- horizontal line
How do you calculate the economic profit with total values?
economic profit = total revenue - total economic cost
What is the demand curve of perfectly competitive firms?
the demand curve is equal to PRICE and MARGINAL REVENUE
What’s the shut down point?
the shut down point is the lowest AVERAGE VARIABLE COST price
When does a firm continue to produce and when does it shut down?
- if total revenue is greater than or equal to the total variable cost, it continues
- if total revenue is less than the total variable cost, it SHUTS DOWN
What happens in short run equilibrium?
firms can’t exit or enter the industry
What happens in long run equilibrium?
firms can enter and exit the industry
What’s normal profit?
zero economic profit
What’s a constant cost industry?
the entry an exit of firms has NO IMPACT on cost curves of other firms in the market.
What’s an increasing cost industry?
the entry of new firms increases the price of resources
What’s a decreasing cost industry?
the entry of new firms decreases the price of resources
What’re the characteristics of a monopoly? (3)
monopoly:
- no close substitutes
- barriers to entry
- market power
What’s a natural monopoly?
when it’s less costly for one firm to supply the entire demand
example of a natural monopoly
power plants
Monopolies are price ____
monopolies are PRICE MAKERS.
- they have complete control over the price.
What’re the demand curves like in perfect competition and monopolies?
- perfect competition: demand is HORIZONTAL
2. monopoly: demand is DOWNWARDS SLOPING.
What’s price discrimination?
the selling of the same good at different prices to different consumers
What conditions make it possible to price discriminate?
price discriminating power:
- the firms has monopoly pricing power
- firm can separate groups of consumers
- firm can prevent resale.
What’re the characteristics monopolistic competition? (3)
monopolistic competition:
- there’s a relatively LARGE number of firms
- there sell DIFFERENT products
- there are NO BARRIERS to entry and exit
What’s EXCESS CAPACITY?
excess capacity is the difference between the monopolistic competition output and the output at minimum ATC
How do you calculate excess capacity?
excess capacity
- monopolistic competition output - minimum ATC
What’re the characteristics of an oligopoly? (4)
oligopoly:
- a few large producers
- can sell either same or different products
- barriers to entry and exit
- mutual interdependence
