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ExamStudyGuideECON102.docx

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Department
Economics
Course
ECON 102
Professor
Dave Brown
Semester
Fall

Description
Chapter 23  There are four major characteristics of the perfect competition market structure o A large number of buyers and sellers o Homogeneous product o Unimpeded industry exit and entry o Equally good information for both buyers and sellers  Because in the perfect competition model many firms produce a homogeneous product, a single firm’s demand curve is perfectly elastic at the going market price.  In order to predict how much the perfect competitor will produce, we assume that it wants to maximize profits o Total revenues = quantity sold X price per unit o In the short run total costs = total fixed costs + total variable costs o Total profits = total revenues – total costs o Marginal revenue = change in total revenue / change in output o Total profits is maximized when marginal revenue = marginal cost  Because the normal rate of return to investment is included in the average total cost curve, the profits we calculate are economic profits  The firms short run shutdown price occurs at its minimum average variable cost value: at a higher price, the firm should produce and contribute to payment of fixed costs. The firm should not produce at a lower price  The firms short run break even price is found at the minimum point on its average total cost curve. At a higher price the firm will earn abnormal profits, at a lower price it suffers economic losses, and at the minimum point, economic profits equal zero  The firms short run supply curve is its marginal cost curve above the short run shutdown point  The short run industry supply curve is derived by summing horizontally all the firm supply curves. The industry supply curve shifts when non price determinants of supply change  In a perfectly competitive market, the going price is set where the market demand curve intersects the industry supply curve  In the long run, because abnormal industry profits induce entry and because negative industry profits induce exit, firms in a perfectly competitive industry will earn zero economic profits o Long run supply curves relate price and quantity supplied after firms have time to enter or exit from an industry o A constant cost industry is one whose long run supply curve is horizontal because input prices are unaffected by output o An increasing cost industry is one whose long run supply curve is positively sloped because the price of specialized (or essential) inputs rises as industry output increases o A decreasing cost industry is one whose long run supply curve is negatively sloped because specialized input prices fall as industry output expands  In a perfectly competitive industry, a firm operates where price = marginal revenue = marginal cost = short run minimum average cost = long run minimum average costs in the long run o Perfectly competitive industries are efficient from society’s point of view because for such industries price equals marginal cost in long run equilibrium o They are also efficient because in long run equilibrium the output rate is produced at minimum average cost o The perfectly competitive model is not a realistic description of any real world industry. Nevertheless, the model of perfect competition helps economists explain and predict economic events Chapter 24 o A monopolist is a single supplier that constitutes an entire industry. The monopolist produces a good for which there are no close substitutes o Barriers to entry are impediments that prevent new firms from entering an industry. There are numerous potential barriers to entry o Some monopolists gain power through the exclusive ownership of a raw material that is essential to produce a good o Licenses, franchises, and certificates of convenience also constitute potential barriers to entry o Patents issued to inventors constitute, for a time, effective barriers to entry o If economies of scale are great relative to market demand, new entrants into an industry will be discouraged. Persistent economies of scale could lead to a natural monopoly o Governmental safety and quality regulations may raise fixed costs to firms in an industry significantly enough so as to deter new entrants o If tariffs on imports are sufficiently high, then producers can gain some measure of monopoly power o The monopolist faces the industry demand curve because the monopolist is the entire industry. Examples of monopolies include local electric power companies and the post office o It is instructive to compare the monopolist with the perfect competito
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