Economics Test Two review - Economics Test Two review The...

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Economics Test Two review The Range of Market Structures Monopoly - One firm industry - No close substitutes - Substantial and effective barriers to entry - Potential long-run profit - Substantial market power and control over price Oligopoly - Few firms - Decision-making is mutually interdependent (each firms decision depends on the others) - Major barriers to entry - Potential long-run profit - Shared market power and control over price Monopolistic Competition - Numerous potential buyers and sellers - Differentiated products that are close substitutes - No entry or exit barriers - No profit in long run - Diffused market power and little control over price Pure competition - Numerous potential buyers and sellers - Homogeneous products - No entry or exit barriers - No profit in long run - Diffused market power and no control over price
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Price takers – are buyers or sellers who are so small relative to a market that the effects of their transactions are inconsequential for market prices Pure Competition characteristics - Competitive buyers and sellers are quantity adjusting price takers (they have no choice but to accept the price set in the market) - Individual competitive buyers view the supply curves are perfectly elastic at the current market price - Competitive sellers perceive the demand curves they face as horizontal at market price - Purely competitive firms compete in one dimension: technically efficient production o Try to minimize costs o Producing the level of output that maximizes profit Freedom of entry and exit means, in the long run, firms can enter an industry with no cost disadvantages relative to establish firms, and established firms can costlessly transfer resources to other industries. Rapid growth of international trade has made many markets much more competitive in recent years All firms are assumed to maximize profit (Total Revenue – Total Cost) Break-even or normal profit points – occur when total revenue = total cost; economic profit is zero Marginal Cost = Marginal Revenue also can be used for profit Marginal Revenue – The increase in total revenue from selling one more unit Marginal Cost – The increase in total cost incurred by producing one more unit of output Purely competitive firm – MR = Price Marginal revenue = marginal cost rule: All profit-maximizing firms produce and sell an extra unit of output only if marginal revenue is at least as great as marginal cost In pure competition a profit-maximizing firm will produce where Price= Marginal Revenue = Marginal Cost All profit-maximizing firms produce and sell until marginal cost just equals the marginal revenue derived from the sale of the good. Total revenue = Price x Quantity Total Cost = Average Cost x Quantity Total profit = Average profit per unit x output
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Price minus ATC = Average profit per unit The lowest break even or normal profit price in a competitive industry occurs when the demand curve facing each individual firm (the price line) is tangent to the minimum point of the firm’s average total cost curve
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