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ECON ch 11 notes

ECON ch 11 notes - Marginal revenue – change in total...

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Perfect competition: 1) Many firms sell identical products to many buyers 2) There are no restrictions on entry into the industry 3) Established firms have no advantage over new ones 4) Sellers and buyers are well informed about prices Perfect competition arises if the minimum efficient scale of a single producer is small relative to the demand for the good or service. Minimum efficient scale – smallest quantity of output at which long-run average cost reaches lowest level Price taker – firm that cannot influence market price and sets own price at market price Key reason: firm produces tiny proportion of total output of a particular good and buyers are well informed about prices of other firms Economic profit – total revenue minus total cost (TR – TC) Total cost – opportunity cost of production (includes normal profit) Normal profit – return that the entrepreneur can expect to receive on the average in an alternative business Total revenue – price of output multiplied by number of units of output sold (Price x Quantity)
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Unformatted text preview: Marginal revenue – change in total revenue that results from a one-unit increase in quantity sold; calculated by dividing change in total revenue by change in quantity sold (∆TR/∆Qsold) Short run decisions Short run – time frame in which each firm has a given plant and number of firms in the industry is fixed Firms must react price fluctuations and decide: 1. Whether to produce or to shut down temporarily 2. If the decision is to produce, what quantity to produce Long run decisions Long run – time frame in which each firm can change the size of its plant and decide whether to leave the industry Other firms can decide whether to enter the industry so both the plant size of each firm and number of firms in the industry can change Constraints can change in the long run Firm must react to long run changes and decide: 1. Whether to increase or decrease its plant size 2. Whether to say in an industry or leave it Profit-Maximizing Output...
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