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Economics Chapter 7

by: Ashley Albers

Economics Chapter 7 Economics 1051

Ashley Albers
GPA 3.3

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Chapter 7 notes
General Economics
George Chikhladze,Martha Steffens
Class Notes
economics 1051, Pure competition
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This 3 page Class Notes was uploaded by Ashley Albers on Thursday March 3, 2016. The Class Notes belongs to Economics 1051 at University of Missouri - Columbia taught by George Chikhladze,Martha Steffens in Spring 2016. Since its upload, it has received 10 views. For similar materials see General Economics in Economcs at University of Missouri - Columbia.


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Date Created: 03/03/16
Chapter 7: Pure Competition 4 Market Models  Any industry has 3 key characteristics, which economists use to classify into 4 market structures o The number of firms in an industry o Homogeneity of the good or service produced by firms in the industry o The edge for new firms to enter and exit the industry  4 market structures o Pure competition  Standardized  Homogeneous products, edge of entry is very high, there are many firms  Example – farm products, large number of products “price takers” o Pure monopoly  There are many firms, affiliated products  Easy entry and exit o Monopolistic competition  Many firms, differentiated products  High and easy entry o Oligarchy  Example – movie studios  Few firms, low entry, identical or differentiated products Pure Competition  Characteristics o Very large numbers of sellers o Standardized product o “Price takers” o Easy entry and exit o Perfectly elastic demand for an individual firm  Firm produces as much or little as they want at that price  Average, total, and marginal revenue o Total revenue  TR = P × Q o Marginal revenue  Extra revenue from 1 more unit  MR = ΔTR / ΔQ o At higher market price, profit increases o As market price increases, optimal quantity also increases  Optimal quantity – when you get the highest profit for amount produced o Farmer Joe is losing money by selling corn but he still chooses to sell corn because he would still have to pay those fixed costs so he’d lose even more money  Shut down condition  Whether to shut down or not depends on how large TVC is compared to TR o If it brings in more revenue than cost than you should keep producing o Shut down if TR < TVC o Keep producing if TR > TVC  Optimal decision  Profit Maximization o Three questions  Should the firm produce?  If so, what amount?  If P>MC, then produce more  If P<MC, then decrease production  Profit maximizing output is where P=MC  What economic profit (loss) will be realized?  Positive profits if TR > TC (fixed and variable)  Negative profits if TR<TC o TR – TC Approach  Should the firm produce?  Produce as long as TR exceeds TVC or  P>min of AVC  Shut down otherwise  What amount to produce?  If P>MC, then produce more  If P<MC, then decrease production  Profit maximizing output is where P=MC  When will the firm realize positive profits?  Firm is profitable if TR>TC  P>min of ATC  Firm breaks even when TC=TR or P=min ATC o Maximization in the long-run  Easy entry and exit  In the long-run all the costs are variable (avoidable)  Hence, firm that incurs a loss in the long-run can exit the industry  In the long-run equilibrium, all competitive firms have zero profits  Zero profit condition  Nothing you can do to sustain profitable income in the long run  a set scenario for a competitive industry  Nothing people can do to stop people from entering the industry  Entry eliminates profit o Firms enter o Supply increases o Prices fall  Exit eliminates losses o Firms exit o Supply decreases o Prices rise


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