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By observing a few industry characteristics such as number of firms in the industry or the level of barriers to entry, economists can use this information to predict pricing and output behavior of the firm in the industry.

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Market Structure Analysis

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A market structure with many relatively small buyers and sellers who take the price as given, a standardized product, full information to both buyers and sellers, and no barriers to entry or exit. -Many buyers and sellers -Homogeneous -No barriers to market entry or exit -No long-run economic profit -No control over price

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Perfect Competition

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Individual firms in perfectly competitive markets get their prices from the market because they are so small they cannot influence market price. For this reason, perfectly competitive firms are price takers and can produce and sell all the output they produce at market-determined prices.

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Price taker

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-Many buyers and sellers -Differentiated products -No barriers to market entry or exit -No long-run economic profit -Some control over price

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Monopolistic Competition

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-Fewer firms (such as auto industry) -Mutually interdependent decisions -Substantial barriers to market entry -Potential for long-run economic profit -Shared market power and considerable control over price

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Oligopoly

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-One firm -No close substitutes -Substantial barriers to market entry -Potential for long-run economic profit -Shared market power and considerable control over price

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Monopoly

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The change in total revenue from selling an additional unit of output. Because competitive firms are price takers, P=MR for competitive firms.

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Marginal Revenue

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Firms maximizing profit by producing output where where MR=MC. No other level of output produces higher profits.

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Profit Maximizing Rule

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Equal to zero economic profits where P=ATC

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Normal Profits

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When price in the short run falls below the minimum point on the AVC curve, the firm will minimize losses by closing its doors and stopping production. Because P<AVC, the firm's variable costs are not covered, therefore by shutting down the plant, losses are reduced to fixed costs only.

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Shutdown Point

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The marginal cost curve above the minimum point on the average variable cost curve.

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Short-run Supply Curve

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An industry that, in the long run, faces higher prices and costs as industry output expands. Industry expansion puts upward pressure on resources (inputs), causing higher costs in the long run.

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Increasing Cost Industry

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An industry that, in the long run, faces lower prices and costs as industry output expands. Some industries enjoy economies of scale as they expand in the long run, typically the results of technological advances.

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Decreasing Cost Industry

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An industry that, in the long run, races roughly the same prices and costs as industry output expands. Some industries can virtually clone their operations in other areas without putting undue pressure on resource prices, resulting in constant operating costs as they expand in the long run.

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Constant cost industry

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Nature of the industry's product, barriers to entry, and extent to which firms can control prices.

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Economists categorize industries using the following characteristics

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leave the industry in the long run

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The cotton industry is experiencing less than normal profits. You can expect some firms to:

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New firms enter, industry supply increases, market price falls

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Which sequence describes the long-run adjustment process in a competitive market when firms are earning short-run economic profits

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increase in supply

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When new firms enter a perfectly competitive market, it will cause an

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is not maximizing its profits

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If a firm produces where marginal revenue exceeds marginal costs, the firm

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Price

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The perfectly competitive model assumes that consumers will base their decisions purchases solely on:

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Predict the behavior of firms

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Market structure analysis allows economists to

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has output that is so small, relative to market supply, that it cannot influence the market price.

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A perfectly competitive firm

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reduce output

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If a competitive firm can sell a bushel of soybeans for $25 and it has an average variable cost of $24 per bushel and the marginal cost is $26 per bushel, the firm should

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Zero economic profits

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Normal profits are equal to

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produce in the short run if the price is above the minimum of the AVC

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The perfectly competitive firm will

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greater than average total cost

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A perfectly competitive firm in the short run will make a profit as long as price is

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both productively and allocatively efficient

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If a perfectly competitive market is in equilibrium, then the market is

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should produce that level of output at which MR=MC

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The profit-maximizing rule states that a perfectly competitive firm:

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The long run price will be $1.50 per bushel

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Consider the corn industry (a perfectly competitive industry). The price per bushel is $2 and there are constant returns to scale. If the long-run, minimum ATC is $1.50 per bushel, it should follow that (ceteris paribus):

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should increase its output

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In the short run, if a firm in a perfectly competitive market is producing where price exceeds marginal cost, the firm

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expand output

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If a perfectly competitive firm can sell a bushel of soybeans for $25 per bushel and it has an average variable cost of $20 per bushel, and the marginal cost is $22 per bushel, it should

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perfect competition. Unlike monopoly, oligopoly, and monopolistic competition

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All market structures experience some type of control over price, EXCEPT

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Monopoly

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_____ is a market where there is no close substitute for the product, potential for long-run economic profit, and nearly impossible barriers to entry

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Oligopoly

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In which market structure can mutual interdependent decision-making occur?

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is $4.67

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When perfectly competitive firm X sells three units of product Z, its marginal revenue is $4.67. When it sells 100 units marginal revenue is $4.67. We can conclude that the price

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-supply increases -market prices fall -firms are attracted to the industry by profits the number of firms in the industry will NOT fall

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When perfectly competitive firms are earning short-run economic profits, all of the following happens

Chapter 8 Perfect Competition

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