1. Principles of MicroEconomics: Econ102

2. 2 of 21 ……………meets the conditions of:  Many buyers and sellers: all participants are small relative to the market.  All firms selling identical products  No barriers to new firms entering the market.

3. 3 of 21 Price taker: A buyer or seller that is unable to affect the market price. A Perfectly Competitive Firm Faces a Horizontal Demand Curve

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5. 5 of 21 Profit: Total revenue minus total cost. Profit = TR – TC where, Total Revenue (TR): Price multiplied by quantity, units or output produced. TR=P x Q

6. 6 of 21 Average revenue (AR): Total revenue divided by the number of units sold. Marginal revenue (MR): Change in total revenue from selling one more unit.

7. 7 of 21 NUMBER OF BUSHELS (Q) MARKET PRICE (PER BUSHEL) (P) TOTAL REVENUE (TR) AVERAGE REVENUE (AR) MARGINAL REVENUE (MR) 0 1 2 3 4 5 6 7 8 9 10 $4 4 $0 4 8 12 16 20 24 28 32 36 40 - $4 4 - $4 4 For a firm in a perfectly competitive market, price is equal to both AR and MR.

8. 8 of 21 QUANTITY (BUSHELS) (Q) TOTAL REVENUE (TR) TOTAL COSTS (TC) PROFIT (TR-TC) MARGINAL REVENUE (MR) MARGINAL COST (MC) 0 1 2 3 4 5 6 7 8 9 10 $0.00 4.00 8.00 12.00 16.00 20.00 24.00 28.00 32.00 36.00 40.00 $1.00 4.00 6.00 7.50 9.50 12.00 15.00 19.50 25.50 32.50 40.50 -$1.00 0.00 2.00 4.50 6.50 8.00 9.00 8.50 6.50 3.50 -0.50 $4.00 4.00 $3.00 2.00 1.50 2.00 2.50 3.00 4.50 6.00 7.00 8.00

9. 9 of 21 Conclusions:  The PMLO is where the difference between total revenue and total cost is the greatest.  The PMLO is also where the marginal revenue equals marginal cost, or MR=MC. One more conclusion:  For a firm in a perfectly competitive industry, price is equal to marginal revenue, or P=MR. So, it logically follows that P=MC, because MR=MC

10. 10 of 21 Profit = (P x Q)  TC Profit = (P  ATC)Q Or

11. 11 of 21 When P > ATC, the firm makes a profit

12. 12 of 21 When P = ATC, the firm breaks even (its total cost equals its total revenue) When P < ATC, the firm experiences losses

13. 13 of 21 In the short-run a firm suffering losses has two choices:  Continue to produce: Only if TR is greater than its variable costs.  Stop production by shutting down temporarily Sunk cost: A cost that has already been paid and that cannot be recovered.

14. 14 of 21 Shutdown point : The minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run.

15. 15 of 21 Long-run Competitive Equilibrium: The situation in which the entry and exit of firms have resulted in the typical firm just breaking even.

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19. 19 of 21 Long-run Supply Curve: A curve showing the relationship in the long run between market price and the quantity supplied. In the long-run, a perfectly competitive market will supply whatever amount of a good consumers demand at a price determined by the minimum point on the typical firm’s average total cost curve.

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21. Allocative Efficiency: The situation where every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing it. For allocative efficiency to hold, firms must charge a price equal to marginal cost. 21 of 21 Productive Efficiency: The situation where every good or service is produced at the lowest possible cost. For productive efficiency to hold, firms must produce at the minimum point of average total cost.