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Unformatted text preview: Economics 20A Midterm Two Study Guide **Disclaimer: This is only a tool to help guide your studying. Make sure you review your lecture notes and read the text. 1 Perfect Competition-There are signi&cantly many &rms so that each has no market power.-Firms are price takers, they cannot in¡uence the price. Market price is determined by supply and demand only.-The goal of &rms is to maximize pro&ts. The pro&t maximizing quantity occurs where marginal cost equals marginal revenue (Price).-Marginal Cost and Industry Supply & A &rm¢s marginal cost determines the quantity that it is willing to sell at any price (determined where price equals marginal cost). & The industry supply is determined by adding together the willingness to sell of all &rms at each price. ¡ To &nd this with lots of identical &rms and linear supply, plot two points of a single &rm¢s supply, then multiply the quantities at those prices by the number of &rms. The resulting points can be plotted and connected by a line to get the industry supply.-Short Run vs. Long Run Equilibrium & Equilibrium price is determined by industry supply and demand. Firms then choose the quantity where marginal cost equals price. & Pro&ts are de&ned to be total revenue minus total cost ( TR ¢ TC ). Also can be calculated as ( P ¢ ATC ) £ q . & In the short run &rms may be making pro&ts or incurring a loss. & In the long run, if there are pro&ts, other &rms will enter the market, resulting in an increased industry supply, which drives the price down, reducing individual pro&ts. Similarly, if &rms are incurring losses, some will leave the market, reducing supply and driving up the price. & The long run equilibrium occurs where pro&ts are zero: where the price equals marginal cost at the quantity that minimizes average total cost. ( P = MC = ATC ) . At this point, no &rms have incentive to leave the market or enter....
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This note was uploaded on 02/27/2012 for the course ECON 600078 taught by Professor Gralic during the Spring '12 term at UC Irvine.
- Spring '12
- Perfect Competition