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14 Cards in this Set
- Front
- Back
three basic asumption for a perfectly competitive market
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1. price taking
2. product homogeneity 3. free entry and exit |
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price taker
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frim that has no influence over market price and thus takes the price as given.
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free entry (exit)
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when there are no special costs that make it difficult for a firm to enter (or exit) industry
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profit
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difference between total revenue and total cost
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marginal revenue
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change in revenue resulting from a one unit increase in output
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demand curve in a competitive market
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demand curve facing an individual firm in a competitive market is both its average revenue curve and its marginal revenue curve. Along this demand curve, marginal revenue, average revenue,and price are all equal.
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profit maximization by a competitive firm
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a perfectly competitive firm should choose its output so that marginal costs equals price (MC (q) = MR = P)
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output rule
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if a firm is producing any output, it should produce at the level at which marginal revenue equals marginal cost.
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shut-down rule
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the firm should shut down if the price of the product is less than the average economic cost of production at the profit-maximizing output.
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producer surplus
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sum over all units produced by a firm of differences between the market price of a good and the marginal cost of production.
Producer surplus = R - VC Profit = R - VC - FC |
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long run profit maximization
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the long-run output of a profit-maximizing competitive firm is the point at which long-run marginal cost equals the price.
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zero economic profit
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a firm earning a normal return on its investment - i.e. it is doing as well as it could by investing its money elsewhere.
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long-run competitive equilibrium
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all firms in an industry are maximizing profit, no firm has an incentive to enter or exit, and price is such that quantity supplied equals quantity demanded.
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economic rent
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amount that firms are willing to pay for an input less the minimum amount necessary to obtain it.
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