Micro Econ Exam Review

Characteristics of competitive market places (3) There must be many buyers and sellers, none of whom can have a macroscopic market share, a few players cannot dominate the market. Firms must produce a standardized product, buyers must see all their products as equivalent. (Identical (Homogeneous) Products), Firms and resources are typically full mobile, allowing free exit and entry. These three conditions make all consumers and producers price- takers. Models Section 12. 2 Market Market Assumptions Firm The firm is a make headway maximizing firm.The undivided firm can sell all they can at the market price. Each exclusive firm supplies only a small portion of market supply, and therefore cant manipulate the market price. The firm Is a price-taker they take the market price as given. 2. Profit Minimization The firm will maximize profit at the output level that has the greatest difference between Revenues + greet. The firm can/will profit maximize where Marginal Revenue (MR..) = M arginal Cost (mackintosh). Since the perfectly competitive firm is a price taker P=MR Therefore, the profit maximizing condition can be written MR..=MAC or FEM.. (SameCondition). If MR.. MAC then Increase Output. If MAC MR.. Then Decrease Output. Model Section 12. 3 Finding the Profit Maximizing Level of Output Model 1 OFF Determine if the firm is generating economic profits, economic losses, or Zero economic profits. NOTE cost curves include both implicit + explicit be + can therefore be used to determine economic profits or losses. 4 Step Process 1 . Determine the profit maximizing level of output (where MR..=MAC). 2. Calculate total revenue = Price x Quantity 3. Calculate total cost = TACT x Quantity (TACT is invariably U Shaped) 4. Compare TRY + ETCIf TRY ETC then Con. Profits If ETC TRY then Con. Losses If TRY = ETC then Zero Con. Profits 5. Models on coterminous page. Section 12. 4 Economic Profits Economic Loss Zero Economic Profits Economic Profits firm is generating enough revenue to blanket accounting cost + opposing cost of resources employed. (Covering both explicit + implicit costs) Indicates an efficient allocation of scarce economic resources. Economic Losses firm whitethorn be screen act. Cost but they are not covering the pop. Cost of resources employed. Indicates an inefficient allocation of scarce economic resources. Long Run analytic thinking If existing firms are generating economic profits it will result in outside firms/ resources to enter the market. Models below Section 12. 5 Individual Firm Individual firms will continue to enter the market until all economic profits have been competed away. In long-run equilibrium all firms will be left over(p) generating zero profit. If existing firms are generating Con. Loss Left with 2 options 1. Continue operating 2. Shut down (temporarily stop producing) If the firm is at least covering bag. Variable cost (PVC) they would be best off to