Chapter 7 notes for Economics
Chapter 7 notes for Economics Eco 280
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This 9 page Class Notes was uploaded by Haley Morse on Wednesday October 5, 2016. The Class Notes belongs to Eco 280 at Northern Arizona University taught by Andrew Parkes in Fall 2016. Since its upload, it has received 22 views. For similar materials see Introduction to Economics in Economics at Northern Arizona University.
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Date Created: 10/05/16
Chapter 7 Chapter objective: The chapter discusses how competitive markets determine prices, output, and profits Market Structure: A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry and exit Perfect Competition: A market structure characterized by: 1. Large number of small firms 2. Homogeneous product 3. Very easy entry and exit 4. Many buyers and sellers (No one has control over a market) Large number of firms: A large number of sellers condition is met when each firm is so small relative to the total market that no single firm can influence the market price Homogeneous: Goods that cannot be distinguished from one another. Buyers are indifferent as to which seller’s product they buy. Example: Farmer brown’s wheat is identical to farmer Jones’s wheat Very Easy Entry: Perfect competition requires that a new firm faces no barriers to entry, such as financial, technical, or government-imposed barriers (licenses, permits, patents) Result of a firm conforming to the perfect competition model: The firm is a price taker, which means it is a seller that has no control over the price of the product What determines price in perfect competition? Market Demand and market supply What determines the individual firm’s demand curve? A horizontal line at the market price Why is this horizontal line the firm’s demand curve? If the firm changes more than this price, it will not sell anything, and it has no incentive to charge less than this price Why is the firm’s demand curve horizontal at the market price? The firm can sell all it produces at the market price Why does the firm have no incentive to charge less than the market price It can sell everything it brings to market at the market price What does the perfectly competitive firm control? As a price taker, the only thing the firm controls is how many units it produces How many units should this firm produce? The number of units that will maximize its profits, or minimize its losses What are the 2 methods to determine how many units to produce? 1. TR and TC method 2. MR and MC method Using the Revenue-total cost method, where should a firm produce? Where the distance between TR and TC is the greatest Marginal Revenue (MR): The Change in total revenue in total revenue from the sale of one additional unit of output AKA PRICE MR=∆TR/∆1 output Marginal Cost (MC): The change in total cost from the sale of one unit of output MC=∆TC/∆1 output Using the marginal revenue and marginal cost method, where should a firm produce? MR=MC Why should a firm continue to produce as long as MR>MC? As long as MR is greater than MC, profit is being made on that last unit produced and sold Why will a firm not produce any unit where MR<MC? At any unit of output where MR<MC, the firm incurs a loss Exhibit 7.5 Short-Run Loss Minimization Using the Marginal Revenue Equals Marginal Cost Method for a Perfectly Competitive Firm If Price (MR) is below minimum average variable cost Firm will shut down What is the perfectly competitive firm’s short-run supply curve? The firm’s marginal cost curve above the minimum point on its average variable cost curve What is the perfectly competitive industry’s supply curve? The horizontal summation of the MC curves of all firms in the industry above that liw above the minimum point on their AVC Curves Normal Profit: The minimum profit necessary to keep a firm in operation In the long-run, what happens when economic profits are made? When firms make more than a normal profit, firms enter the industry; as supply increases, a downward pressure is put on prices In the long-run, what happens when losses are made? When firms make less than a normal profit, firms leave the industry; as supply decreases, an upward pressure is put on prices In the long-run, where is equilibrium? At the market price that enables firms to make a normal profit Price*Quantity=Total Revenue Total cost=ATC*Quantity Steps to drawing these curves: 1. MR=MC 2. q (Perfect quantity P.C) 3. ATC 4. Shade profit or loss
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