economics study guide #2 - What do Market Structures...

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What do Market Structures describe? (How to produce/ what price to charge) industry=market - Number of suppliers - Product’s degree of uniformity - Ease of entry into the market - Forms of competition among firms (means to strive with) What is Perfect Competition? - Many buyers and sellers - Sell a standardized product (commodity) - Buyers and sellers fully informed about price and availability of resources and products - Easy to enter or leave market No control over price (only small fraction of market) price taker Demand curve is a horizontal line at market price (perfectly elastic) Marginal revenue=market price=average revenue Golden rule of profit maximization – MR=MC (increases production as long as MR exceeds marginal cost With total curves measure vertical distance, but with per-unit measure area Firms are stuck in their industry in the short run - Produces as long as total revenue exceeds variable cost - Fixed cost is a sunk cost - Industry supply curve=horizontal sum of firm above shutdown point In the long run firms in perfect competition earn a normal profit Long run supply curve is horizontal for constant-cost industry Why is perfect competition so efficient? - Productive efficiency – producing output at least possible cost (minimum average cost) - Allocative efficiency – output that consumers value the most (marginal benefit=marginal cost) - Making stuff right, but making the right stuff Chapter 9 What is a monopoly? (“One seller”) Sole supplier of a product with no close substitutes - D What are barriers to entry? - Legal restrictions o Patents and invention incentives – exclusive right for 20 years, innovation – turning an invention into a marketable product o Licenses - Economies of scale – 1 firm can supply market demand at a lower average cost per unit than could two or more firms (each producing less), natural monopoly
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- Control of essential resource Demand a monopolist outputs is also market demand (slopes downward) and average revenue curve, marginal revenue is less than price, graphs
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