Microeconomics 8
Profit maximization and competitive supply
Profit maximization and competitive supply
Set of flashcards Details
| Flashcards | 17 |
|---|---|
| Language | English |
| Category | Macro-Economics |
| Level | University |
| Created / Updated | 17.11.2012 / 13.03.2015 |
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3 assumptions of perfect competition
(1) price taking, (firms accept market price)
(2) product homogeneity, and (no close substitutes)
(3) free entry and exit.
price taker
Firm that has no influence over market price and thus takes the price as given.
free entry (or exit)
Condition under which there are no special costs that make it difficult for a firm to enter (or exit) an industry.
cooperative
Association of businesses or people jointly owned and operated by members for mutual benefit.
profit
Difference between total revenue and total cost.
π(q) = R(q) − C(q)
marginal revenue
Change in revenue resulting from a one-unit increase in output.
Maximized profit: MR(q) = MC(q)
Shut-Down Rule:
The firm should shut down if the price of the product is less than the average variable cost of production at the profit-maximizing output.
firm’s supply curve
The firm’s supply curve is the portion of the marginal cost curve for which marginal cost is greater than average variable cost.
The Response of a Firm to a Change in Input Price
When the marginal cost of production for a firm increases (from MC1 to MC2), the level of output that maximizes profit falls.
In the short-run, only wages can change
Industry Supply in the Short Run
The short-run industry supply curve is the summation of the supply curves of the individual firms.
producer surplus
Sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.
Producer surplus = PS = R − VC
zero economic profit
A firm is earning a normal return on its investment—i.e., it is doing as well as it could by investing its money elsewhere.
long-run competitive equilibrium
All firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.
economic rent
Amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.
constant-cost industry
Industry whose long-run supply curve is horizontal.
increasing-cost industry
Industry whose long-run supply curve is upward sloping.
decreasing-cost industry
Industry whose long-run supply curve is downward sloping.
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