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Economics - Perfect Competition, Study notes of Economics

Detail Summery about Perfect Competition, How a Firm Maximizes Profit in a Perfectly Competitive Market, The Supply Curve of the Firm in the Short Run , Economic Profit and the Entry or Exit Decision, long-run supply curve , The Competitive Market for Microsoft Stock.

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2010/2011

Uploaded on 09/02/2011

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PERFECT COMPETITION
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PERFECT COMPETITION

 (^) Define a perfectly competitive market, and explain why a perfect competitor faces a horizontal demand curve.  (^) Explain how a perfect competitor decides how much to produce.  (^) Use graphs to show a firm’s profit or loss.  (^) Explain why firms may shut down temporarily.  Explain how entry and exit ensure that perfectly competitive firms earn zero economic profit in the long run.

 (^) Prices in perfectly competitive markets are determined by the interaction of market demand and market supply. Each firm must accept the market price; it has a perfectly elastic demand curve.  (^) The objective of each firm is to maximize profits or to make the difference between total revenue and total cost as large as possible.  (^) The firm will produce the output where the marginal revenue (MR), which is equal to price, is equal to marginal cost (MC).  (^) In the short run, at the output where MR = MC, the firm’s price: (a) will exceed its average total cost (ATC), which means it will make an economic profit, or (b) will equal ATC so its total cost will equal total revenue and it earns no economic profit, or (c) will be less than ATC, which means the firm experiences a loss.

HOW A FIRM MAXIMIZES PROFIT IN A PERFECTLY COMPETITIVE MARKET The Profit-Maximizing Level of Output

  • (^) The Supply Curve of the Firm in the Short Run Shutdown point The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

 (^) When firms earn short-run profits, other firms will enter the industry.  This shifts the industry supply curve to the right and lowers the market price.  Entry continues until firms break even (earn zero economic profit).  When firms suffer short-run losses, some firms will exit the industry.  (^) The exit of firms shifts the industry supply curve to the left and the market price increases. Exits continue until firms break even.

  • (^) Economic Profit and the Entry or Exit Decision
    • (^) ECONOMIC LOSSES LEAD TO EXIT OF FIRMS

 (^) The long-run supply curve in a perfectly competitive market shows the relationship between market price and quantity supplied.  (^) In the long run, a perfectly competitive market will supply the amount of a good or service consumers demand at a price determined by the minimum point on the typical firm’s ATC.  Firms will produce a good or service up to the point where the marginal cost of producing another unit of output is equal to the marginal benefit consumers receive from consuming that unit.

  • (^) Profit = ( P x Q )  TC ILLUSTRATING PROFIT OR LOSS ON THE COST CURVE GRAPH (^3) LEARNING OBJECTIVE   Q ( P Q )  Q Profit Q TC , Profit P ATC Q  
  • (^) Profit = ( PATC ) Q
  • (^) Or

The Competitive Market for Microsoft Stock  (^) The software market has long been dominated by the Microsoft Corporation. Chairman Bill Gates is one of the few corporate executives who is well-known on Main Street as well as Wall Street. But unlike its software, shares of Microsoft’s common stock are sold in a competitive market. Over 60 million shares of Microsoft stock, out of over 10 billion shares outstanding, were sold every business day in 2005.  (^) Since each share is exactly the same as any other, the thousands of buyers and sellers of the stock were “price takers.” On a given day, they all must accept the stock price established by the market given. In June 2005, this price was about $25 per share.  (^) Sources: http://microsoft.com/msft/ and The Wall Street Journal, June 24, 2005.