Study Guides (248,356)
United States (123,340)
Economics (116)
ECON 102 (54)


4 Pages
Unlock Document

ECON 102
Dave Brown

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
More Less

Related notes for ECON 102

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.