Micro- Perfect Competition and the Supply Curve
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
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show | 1. Many buyers and sellers
2. The product is standardized across sellers (standardized product aka commodity)
3. Free entry and exit
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show | fraction of the total industry output accounted for by that producer's output/both sellers and buyers are price-takers (their actions have no effect on price)
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show | "commodity": Consumers regard different sellers' products as equivalent
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show | New producers can easily enter into an industry and existing producers can easily leave that industry
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show | TR=PxQ
(price x quantity sold)
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show | Profit=TR-TC
(total revenue-total cost)
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show | change in total revenue generated by an additional unit of output
MR=change in TR/change in quantity
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Optimal output rule | show 🗑
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show | Each time the firm produces another unit, there are extra costs and extra revenues
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If MR> MC producing less will | show 🗑
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show | add to profit
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show | Choose the quantity of output where P=MC
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If TR>TC, the firm is | show 🗑
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If TR=TC, the firm | show 🗑
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show | incurs a loss
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show | Profit= TR-TC=(TR/Q - TC/Q) x Q
or
Profit = (P-ATC) x Q
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Break-even price | show 🗑
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show | price is greater than average cost
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Shut-down price | show 🗑
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Firms will choose to produce (even at a loss) IF | show 🗑
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show | zero economic profits
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Should a competitive firm keep producing even if it faces short-run losses (and is producing at a point on its MC curve that is above the minimum AVC)? | show 🗑
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In the short run, a firm will produce IF | show 🗑
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show | P<min AVC
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If P> break-even (min ATC), firms are | show 🗑
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show | more firms are willing to supply
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show | the quantity demanded, given that sufficient time has elapsed for entry into and exit from the industry to occur
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The LRS shows how | show 🗑
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show | always flatter-more elastic-than the short-run industry supply curve
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show | -a higher price attracts new entrants in the long run, raising industry output and lowering price
-a fall in price induces existing producers to exit in the long run, reducing industry output and raising price
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If the market price is above the break-even level (no matter how slightly) ... | show 🗑
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The long-run market equilibrium in perfectly competitive industry with identical firms results in all firms: | show 🗑
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