What are the three main constraints a firm faces according to the notes?
- Technological constraints (from the production function).
- Economic constraints (on how much to spend).
- Market constraints (what consumers are willing to buy).
What is the “demand curve facing the firm”?
It is the relationship between the price the firm sets and the quantity of output it sells.
What is a firm’s “market environment”?
It refers to the way firms respond to one another in the market.
What are the key characteristics of a Pure Competition market environment?
- The market price is independent of the firm’s actions.
- The firm must sell all its output at the prevailing market price.
- The firm is a “price taker.”
Can perfect competition exist with only a few firms?
Yes, perfect competition can exist even with few firms, provided they all treat the market price as something beyond their individual control.
Describe the individual firm’s supply curve in a competitive market.
- If it sets a price above the market price (p), quantity demanded from it is zero.
- If it sets a price below p, it faces the entire market demand.
- The firm is “small,” supplying only a small portion of total market demand at p*.
What is the short-run profit function for a competitive firm?
π=py−c(y)−Fπ=py−c(y)−F, where pypy is revenue, c(y)c(y) is variable cost, and FF is fixed cost.
What is the First-Order Condition (FOC) for profit maximization in the short run?
Price must equal Marginal Cost: P=MC(y)P=MC(y).
What is the Second-Order Condition (SOC) for profit maximization? What does it ensure?
The slope of the Marginal Cost curve must be positive: ∂MC(y)∂y>0∂y∂MC(y)>0. This ensures the firm is at a profit maximum (on the upward-sloping portion of the MC curve) and not a minimum.
Why is the downward-sloping portion of the MC curve an “unstable equilibrium”?
It does not incentivize the firm to move toward that point. At that point, both increasing and decreasing output can appear profitable, pushing the firm away to the stable equilibrium on the upward-sloping portion.
What is the firm’s shutdown rule in the short run?
The firm will shut down (produce y=0) if the price falls below the minimum of its Average Variable Cost (AVC).
- P<AVCP<AVC: Shutdown (y=0)
- P≥AVCP≥AVC: Produce y>0
What is the difference between a shutdown and an exit?
A shutdown is a short-run decision to produce zero output. An exit is a long-run decision to leave the industry entirely.
What is the firm’s short-run supply curve?
The portion of its Marginal Cost (MC) curve that lies above the minimum of the Average Variable Cost (AVC) curve.
What is the long-run profit function?
π=py−c(y)π=py−c(y). (There is no separate fixed cost, F, as all costs are variable in the long run).
What is the shutdown, break-even, and thriving condition for a firm in the long run?
- P<ACP<AC: Shutdown point (should exit the industry).
- P=ACP=AC: Break-even point (firm is indifferent but will stay).
- P>ACP>AC: Thriving point (firm makes economic profit).
What is the firm’s long-run supply curve?
The portion of its Marginal Cost (MC) curve that lies above the minimum of the Long-Run Average Cost (AC) curve.
How does the elasticity of the Long-Run (LR) supply curve compare to the Short-Run (SR) supply curve?
The LR supply curve is more elastic (flatter) than the SR supply curve.
How are the Long-Run Marginal Cost (LRMC) and Short-Run Marginal Cost (SRMC) related?
The LRMC and SRMC coincide at the output level (y) for which the fixed factor in the short run is at its optimal level.
Describe the supply curve for a firm with constant Long-Run Average Costs.
- P=cminP=cmin: The firm is willing to supply any amount of output.
- P>cminP>cmin: The firm will supply a large (theoretically infinite) amount.
- P<cminP<cmin: The firm supplies zero output (y=0).
What does the market price measure in a competitive market?
The market price measures the Marginal Cost for all firms producing at their profit-maximizing level.
What is Producer Surplus (PS)? Provide two formulas for it.
- PS=Revenue−Variable CostsPS=Revenue−Variable Costs
- PS=Profit+Fixed CostsPS=Profit+Fixed Costs
What is the relationship between Producer Surplus and Profit in the Long Run if Fixed Costs are zero?
If Fixed Costs are zero, then Long-Run Producer Surplus is equal to Economic Profit.
What does the area under the Marginal Cost curve represent?
The area under the Marginal Cost curve up to a quantity y represents the Total Variable Cost, cv(y)cv(y), of producing that output.
What do the terms y×ACy×AC and y×AVCy×AVC represent?
- y×AC=c(y)y×AC=c(y) = Total Cost
- y×AVC=cv(y)y×AVC=cv(y) = Total Variable Cost
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Lesson 221
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Lesson 333
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Lesson 418
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Lesson 525
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Lesson 622
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Lesson 719
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Lesson 814
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Lesson 915
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Formulas18
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Market Equilibrium27
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Technology26
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Profit Maximization28
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Cost Minimization64
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Cost Curves17
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Firm supply24
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Industry Supply26
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General Equilibrium51
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Monopoly and Monopsony42
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Oligopoly32
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Externalities5
