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Unformatted text preview: PAM 200 Chapter 9 Characteristics of perfectly competitive markets Fragmented industry- industry that consists of many small buyers and sellers; one of the characteristics of a perfectly competitive industry Undifferentiated products- products that consumers perceive as being identical; one of the characteristic of a perfectly competitive industry Perfect information about prices- full awareness by consumers of the prices charged by all sellers in the market; one of the characteristics of a perfectly competitive industry Equal access to resources- condition in which all firms- those currently in the industry, as well as prospective entrants- have access to the same technology and inputs; one characteristic of perfectly competitive industry Three implications for how perfectly competitive markets work Price take- seller or a buyer that takes the price of the product as given when making an output decision (seller) or a purchase decision (buyer) Law of one price- in a perfectly competitive industry the occurrence of all transactions between buyers and sellers at a single, common market price Free entry- characteristic of an industry in which any potential entrant has access to the same technology and inputs that existing firms have Economic vs. Accounting Profit Economic cost measures opportunity cost of resources firm uses to produce/sell products while accounting cost measures historical expenses incurred by firm to produce and sell output Economic profit = sales revenue - economic costs Accounting profit= sales revenue - accounting costs Economic profit- difference between firms sales revenue and totality of economic costs including all relevant opportunity costs Economic value added- widely used measure of economic profit, equal to companys accounting profit minus minimum return on invested capital demanded by firms investors (refers to economic profit) =TR(Q)-TC(Q) where TR is total revenue from selling Q and TC is total cost of Q TR(Q) = P*Q Marginal revenue- rate at which total revenue changes with respect to output TR/ Q=MR for a price taking firm:...
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- Spring '08