Economics Chapter 12

perfect competition

Perfectly competitive market -- a market with hundreds or thousands of sellers and buyers of a standardized good. Each buyer and seller takes the market price as given. Firms can easily enter or exit the market
firm specific demand curve -- a curve showing the relationship between the price charged of a specific firm and a quantity that can be sold by that firm
economic profit -- total revenue minus total economic cost
total revenue -- the money the firm gets by selling its product; equal to the price times the quantity sold
accounting profit -- total revenue minus explicit costs
marginal revenue -- the change in total revenue that results from selling one more unit of output
breakeven price -- the price at which the economic profit is zero; price equals average total cost
shutdown price -- the price at which the firm is indifferent between operating in shutting down; equal to the minimum average variable cost
sunk cost -- a cost a firm has already paid or has agreed to pay sometime in the future
firms short run supply curve -- a curve showing the relationship between the price of a product and the quantity of output supplied by affirming the short run
short run market supply curve -- a curve showing the relationship between price and quantity supplied in the short run
long run market supply curve -- a curve showing the relationship between the market price and quantity supplied in the long run
increasing cost industry -- an industry in which the average cost of production increases as the total output of the industry increases; the long run supply curve is positively sloped
constant cost industry -- an industry in which the average cost of production is constant; the long run supply curve is horizontal

Notes

In the short run, a firm uses the marginal principle to decide how much output to produce. In the long run, a firm will enter a market if the price exceeds the average cost of production.
A price taking firm should produce the quantity of output at which the marginal revenue (the price) equals the marginal cost of production.

At unprofitable firms should continue to operate if its total revenue exceeds the total durable cost.

The long run supply curve will be positively sloped if the average cost of production increases as the industry grows.

The long run supply curve is flatter than the short run supply curve because there are diminishing returns in the short run, but not in the long run.

An increase in demand causes a large upward jump in price, followed by a downward slide to the new long-run equilibrium price.