What are the three requirements for a perfectly competitive market?
- many buyers and sellers
- all firms sell identical products
- no barriers to entry / exit
What is the relationship of buyers and sellers to price in a perfectly competitive market?
- individual firms and consumers are price takers
What are the four main market structures?
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
What are the 3 main characteristics of monopolistic competition?
- Many buyers and sellers
- differentiated product
- no barriers to entry and exit
What are the 3 main characteristics of oligopoly?
- few firms
- either identical or differentiated product
- barriers to entry
What are the 3 main characteristics of monopoly?
- one firm
- unique product
- entry to market is blocked
What’s the formula for MR?
MR = change in TR / change in Q
Where is profit maximized?
(3 points)
- the distance between TC & TR is greatest
- slope of TR = slope of TC
- where MR = MC (& = P for perfect competition)
What does MR = in a perfectly competitive market?
In a perfectly competitive market, MR = P = AR
What is residual demand?
The part of the market demand left over for a firm after the supply of all it’s competitors has been taken into account.
What are the two formulas for profit?
Profit = (P * Q) - TC
Profit = (P - ATC) * Q
* remember that firms maximize total profit, not profit per unit.
When does a firm incurr a loss?
P < ATC = Loss
When does it make sense to keep operating at a loss?
TR > TVC@ profit maximizing Q
P >/= AVC @ profit maximizing Q
Where does the MC curve = firm’s supply curve?
As long as P > / = AVC, MC curve = supply curve
Where do we find the shutdown point for a firm?
Where MC = AVC = AVC @ it’s lowest
What is the size of a loss graphically?
Rectangle between Q where MC= MR, and up to ATC at that Q.
How do we find a firm’s supply curve?
- Build an Excel table with all calculations linked
○ Make sure there’s a column for price - Input the various prices and find the places where MR (>)= MC for each given market price.
○ If you’re not given market prices, just pick some.
Basically MC curve = supply curve above P>/= AVC
What does economic profit do in a perfectly competitive market?
- Attracts more firms
- Which pushes the supply curve to the right
- Which lowers the market price down to where the average firm’s ATC = MC
If P > ATC for the average firm, what happens to the number of firms in a perfectly competitive market?
More firms enter the market until P = ATC
If P < ATC, what happens to the number of firms in the market?
Firms will leave the market until P is pushed back up to P = ATC for the average firm.
What does the LR supply curve look like in a constant cost industry?
Horizontal
What does the LR supply curve look like in an increasing cost industry?
upwards sloping
What does the LR supply curve look like in a decreasing cost industry?
Downwards sloping
What makes an increasing cost industry?
At least one of the inputs is limited such that as the demand for it increases, the cost of it also increases.
