Economics: Chapter 10 – Flashcards
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Pure competition
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Very large number of firms No control over price No nonprice competition
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Pure monopoly
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One firm Unique product Much control over price
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Monopolistic competition
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Differentiated products Many firms Some price control
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Oligopoly
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Few firms Standardized products Many obstacles to entry
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We study pure competition because it
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produces ideal results in terms of low-cost production and allocative efficiency, and can be used as a basis of comparison.
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Consider the statement: "Even if a firm is losing money, it may be better to stay in business in the short run." This statement is
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true if the loss is less than the fixed cost.
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The firm should produce in the short run so long as the price
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exceeds the average variable cost.
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Consider a firm that has no fixed costs and which is currently losing money. Are there any situations in which it would want to stay open for business in the short run?
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No, the firm will want to shut down.
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A firm with no fixed cost
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is really in the long run.
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The equality of marginal revenue and marginal cost is essential for profit maximization in all market structures because when this is true the
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last unit produced adds more to revenue than to costs, and its production must necessarily increase profits or reduce losses.
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When an industry is purely competitive, price can be substituted for marginal revenue in the MR = MC rule because
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the demand curve is perfectly elastic and the price is constant regardless of the quantity demanded, so the MR is constant and equal to the price.
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If a firm's current revenues are less than its current variable costs, it should shut down
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immediately.
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If a firm's current revenues are less than its current variable costs and it decides to shut down, this decision
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may be temporary until the price of the product increases.
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Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is:
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A horizontal line at 2 cents per paper clip.
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A purely competitive firm whose goal is to maximize profit will choose to produce the amount of output at which:
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TR exceeds TC by as much as possible.
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If it is possible for a perfectly competitive firm to do better financially by producing rather than shutting down, then it should produce the amount of output at which:
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MR = MC.
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A perfectly competitive firm that makes car batteries has a fixed cost of $10,000 per month. The market price at which it can sell its output is $100 per battery. The firm's minimum AVC is $105 per battery. The firm is currently producing 500 batteries a month (the output level at which MR = MC). This firm is making a _____________ and should _______________ production.
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loss; shut down
