CHAPTER 7 (2014)Apunte Inglés
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ECONOMICS. CHAPTER 7
PERFECT COMPETITION: PRODUCTION & PROFITS.
PERFECT COMPETITION AND PRICE-TAKERS.
Price-taking producer: The one whose actions have no effect on the market price of the good it sells.
Price-taking consumer: The one whose actions have no effect on the market price of the good he buys.
Perfectly competitive market: Market in which all participants are price-takers.
Perfectly competitive industry: Industry in which all producers are price-takers.
TWO NECESSARY CONDITIONS FOR PERFECT COMPETITION: 1-Must contain many producers, none of whom have a large market share.
MARKET SHARE: Fraction of the total industry output accounted for by that producer’s output.
2-Consumers regard the products of all producers as equivalent.
STANDARDIZED PRODUCT (commodity): Consumers regard the product of different producers as the same good.
*A perfectly competitive industry must produce a standardized product. People must think that these products are the same.
FREE ENTRY AND EXIT (Can be the third condition).
New producers can easily enter or leave that industry.
It ensures about: 1.Number of producers can adjust to changing market conditions.
2.Producers in an industry cannot artificially keep other firms out.
*Free entry and exit is not strictly necessary for perfect competition, but is present in most of them.
PROFIT = TOTAL REVENUE - TOTAL COST TOTAL REVENUE = PRICE · QUANTITY PRODUCTION AND PROFITS.
Marginal benefit: Additional benefit derived from producing one more unit of that good or service.
Marginal revenue: Change in total revenue generated by an additional unit of output.
In a perfectly competitive industry: MARGINAL REVENUE = PRICE.
OPTIMAL OUTPUT RULE: Profit is maximized by producing the quantity of output at which the marginal cost of the last unit produced is equal to its marginal revenue.
MR = MC The optimal output rule says that max profit produce the quantity where Marginal Revenue is equal to Marginal Cost (MR=MC).
ECONOMICS. CHAPTER 7 Marginal Revenue Curve shows how marginal revenue varies as output varies.
*When a firm is a price taker: MR curve is an horizontal line.
Economic profits: Firm’s revenue - Opportunity cost of resources.
Explicit costs: Cost that involve actual outlay of money.
Implicit costs: Don’t require money outlay — Measured by value in dollar terms.
Accounting profit: Firm’s revenue - Explicit cost HOW TO CALCULATE PROFIT.
Profit = TR - TC Or: PROFIT PER UNIT · QUANTITY OF UNITS PRODUCED PROFIT, BREAK-EVEN or LOSS.
The break-even price of a price-taking firm is the market price at which it earns zero profits.
A product is profitable — Market price exceeds the minimum average total cost.
Breaks-even — Market price equals to minimum average total cost.
Unprofitable — Market price is less than minimum average total cost.
SHORT RUN PRODUCTION DECISION.
Fixed costs are irrelevant — CANNOT be changed in the short run.
Shut-down price: When price is equal to minimum average variable cost.
Sunk cost — Already been incurred and is NON-RECOVERABLE — Not included in production decisions.
INCUR LOSS IN SHORT RUN when P > AVC SHUT DOWN when P < AVC INDUSTRY SUPPLY CURVE: SHORT-RUN.
The Industry Supply Curve shows the relationship between the price of a good and the total output of the industry as a whole.
SHORT-RUN: Short-run industry supply curve shows how the quantity supplied by an industry depends on the market price given a fixed number of producers.
Short-run market equilibrium when quantity supplied = quantity demanded.
ECONOMICS. CHAPTER 7 LONG-RUN INDUSTRY SUPPLY CURVE.
LONG-RUN MARKET EQUILIBRIUM when quantity supplied = quantity demanded.
COST OF PRODUCTION AND EFFICIENCY IN LONG RUN.
1.In a perfectly competitive industry in equilibrium — Marginal cost is the same for all firms.
2.In a perfectly competitive industry with free entry and exit — Each firm will have zero profits in the long-run equilibrium.
3.Long-run market equilibrium of a perfectly competitive industry IS EFFICIENT.