Nama: Derry Mipa Salam

Resume from “Principles of Microeconomical Kneebone and Gregory

The four types of market structure

Number of firms?

Monopolistic Perfect
Monopoly Oligopoly
competition competition
tap water tennis balls novels wheat
cable tv crude oil movies milk

The meaning of competition

A perfectly competitive market has the following characterictics:
a. There are many buyers and sellers in the market
b. The goods offered by the various sellers are largely the same
c. Firms can freely enter or exit the market
As a result of its characteristics, the perfectly competitive market has the following outcomes:
a. The action of any single buyer or seller in the market have a neglilible impact on market price
b. Each buyer and seller takesthe market prices as given.
Buyers and seller in competitive markets are said to be price takers. Buyer and sellers must accept the
price determined by the market.

Revenue of a competitive firm

Total revenue :
 for a firm is the selling price times the quantity sold (TR =(P x Q)
 is proportional to the amount of output.
Average revenue
 Tell us how much revenue a firm receives for the typical unit sold.
 In perfect competition, average revenue equals the price of the good.
Total Revenue
Average Revenue=
Quantity
 ( price x quantity )
¿
Quantity
¿ price

Marginal revenue
 Is the change in total revenue from an additional unit sold
∆ TR
MR=
∆Q
 For competitive firms, marginal revenue equals the price of the good

Profit maximization for the competitive firm

 The goal of a competitive firm is to maximize profit. This means that the firm will want to produce
the quantity that maximizes the difference between total revenue and total cost.

 Profit maximization occurs at the quantity where marginal revenue equals marginal cost.
 When MR> MC ↑ increase Q
 When MR< MC ↓ de crease Q
 When MR = MC
 ↑ profit is maximized∨↓ lossis minimized

The firm’s short-run decision to shut down

 A shut down refers to a short-run decision not to produce anything during a spesific period anything
during a spesific period of time because of current market conditions. Exit refers to a long-run
decision to leave the market. The firm considers its sunk costs when deciding to exit, but ignores
 them when deciding whether to shut down. Sunks costs are costs that have already been commited
and cannot be covered.
Shut down if :
 T R<V C
TR VC
 <
Q Q
 P< A VC

 The portion of the marginal-cost curve that lies above AVC is the competitive firms shor-run supply
curve

The firm’s Long-run Decision to Exit or Enter a Market

In the long-run, the firm exits if the revenue it would get from producing is less than its total cost. Exit if :
 TR<VC
TR VC
 <
Q Q
 P< AVC
A firm will enter the industry if such an action would be profitable. Enter if :
 TR>VC
TR VC
 >
Q Q
 P> AVC
The competitive firm’s long-run supply curve

 The competitive firm’s long-run supply curve is the portion of its marginal-cost curve that lies above
average total cost.

T=
The firm’s short-run and long-run supply curve
a. short-run supply curve
the portion of its marginal cost curve that lies above average variable cost
b. long-run supply curve
the marginal cost curve above the minimun point of its ATC curve
Multiple choice
1. Which of the following occurs in the case of a perfectly competitive firm?
a. Chooses its price to maximize profits
b. Sets its price to undercut other firms selling similar products
c. Takes its price as given by market conditions
d. Picks the price that yields the largest market share
Jawab :
A perfectly competitive firm is known as a price taker because the pressure of competing firms forces
them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market
raises the price of its product by so much as a penny, it will lose all of its sales to competitors. When a
wheat grower wants to know what the going price of wheat is, they have to go to the computer or listen to
the radio to check. The market price is determined solely by supply and demand in the entire market and
not by the individual farmer. Also, a perfectly competitive firm must be a very small player in the overall
market so that it can increase or decrease output without noticeably affecting the overall quantity supplied
and price in the market.

2. A competitive firm maximizes profit by choosing the quantity where which condition occurs?
a. Average total cost is at its minimum
b. Marginal cost equals the price
c. Average total cost equals the price
d. Marginal cost equals average total cost
Jawab :
Competitive Firms in a perfectly competitive markets act as a price taker. The firms only have the
flexibility to choose the level of output but have to take the price of the good as given and constant.
In a perfectly competitive market, average revenue = marginal revenue = price. This is because price
equals average revenue because all units are sold for the same price, therefore, total revenue divided by
quantity will always equal the price. Average revenue always equals marginal revenue because no matter
the number of units sold, the same price is added to total revenue.
In the competitive market, each buyer and seller is a price taker so none of them can purchase any
quantity at the market price without affecting that price. Similarly, a price-taking firm assumes it can sell
whatever quantity it wishes at the market price without affecting the price.
3. A competitive firm's short-run supply curve is its … cost curve above its … cost curve.
a. Average total, marginal
b. Average variable, marginal
c. Marginal, average total
d. Marginal, average variable
Jawab :
Marginal cost is the change in total cost to change in quantity. It means extra cost is generated due to
extra quantity such that the marginal cost is formed. It shows that the marginal cost is a positive slope. In
the short run, a change in the market price induces the profit-maximizing firm to change its optimal level
of output. This optimal output occurs when price is equal to marginal cost, as long as marginal cost
exceeds average variable cost. Therefore, the supply curve of the firm is its marginal cost curve, above
average variable cost. (When the price falls below average variable cost, the firm will shut down.)

4. If a profit-maximizing, competitive firm is producing a quantity at which marginal cost is between

average variable cost and average total cost, it will do which of the following?
a. Keep producing in the short run but exit the market in the long run
b. Shut down in the short run but return to production in the long run
c. Shut down in the short run and exit the market in the long run
d. Keep producing both in the short run and in the long run
Jawab :
A profit-maximizing firm is one that looks to produce an output where the marginal cost (MC) is equal to
the marginal revenue (MR). Competitive firms do not earn positive economic profits even at MC=MR in
the long run.
A firm will remain open in the short term if the margin cost exceeds AVC, however a firm will exit the
market if the marginal cost is less than ATC. Therefore if the price is between these two curves the firm
will stay open in the short term and exit in the longterm.
The profit-maximizing choice for a perfectly competitive firm will occur where marginal revenue is equal
to marginal cost—that is, where MR = MC. A profit-seeking firm should keep expanding production as
long as MR > MC. But at the level of output where MR = MC, the firm should recognize that it has
achieved the highest possible level of economic profits. Expanding production into the zone where MR <
MC will only reduce economic profits. Because the marginal revenue received by a perfectly competitive
firm is equal to the price P, so that P = MR, the profit-maximizing rule for a perfectly competitive firm
can also be written as a recommendation to produce at the quantity where P = MC.
5. In the long-run equilibrium of a competitive market with identical firms, what is the relationship
between price P, marginal cost MC, and average total cost ATC?
a. P> MC∧P> ATC
b. P> MC∧P=ATC
c. P=MC ∧P> ATC
d. P=MC ∧P= ATC
Jawab :
Remember that here is that we need understand first graph. So because when you have long-run with
benefits they go to zero for this reason we are around price exactly equal to MC and ATC. So this is
going to be deadia of the relationship P a marginal cost.
6. Pretzel stands in Ottawa are a perfectly competitive industry in long-run equilibrium. One day, the
city starts imposing a $100 per month tax on each stand. How does this policy affect the number of
pretzels consumed in the short run and in the long run?
a. Down in the short run, no change in the long run
b. Up in the short run, no change in the long run
c. No change in the short run, down in the long run
d. No change in the short run, up in the long run
Jawab :
Perfectly competitive firms face a perfectly elastic demand curve. This demand curve is a perfectly
horizontal line representing the market price. This occurs because perfectly competitive firms have no
price power. Perfect competitors have no control over the price that they charge.
It changes the fixed cost, but still the VC remain the same, then in the short run firm’s cannot go out and
long-run firms exit the market because this high gear price is going to be higher cost for the company. So
this time is gonna be higher price, less pretzels consumed.
The number of pretzels is going to be no change in the short run because its going to be exactly the same,
but down in the long run given the increase of these tax for the company.