Micro Econ Exam 3 Review
Economics Exam #3 Review
1. Characteristics of competitive markets (3):
There must be many buyers and sellers, none of whom can have a large market share, a few players cannot dominate the market.
Firms must produce a standardized product, buyers must see all their products as equivalent. (Identical (Homogenous) Products).
Firms and resources are typically fully mobile, allowing free exit and entry.
These three conditions make all consumers and producers price-takers.
Models: Section 12.2
Market Firm
Market Assumptions:
The firm is a profit maximizing firm.
The individual firm can sell all they can at the market price.
Each Individual firm supplies only a small portion of market supply, and therefore can’t manipulate the market price.
The firm is a price-taker: they take the market price as given.
2. Profit Maximization:
The firm will maximize profit at the output level that has the greatest difference between Revenues + Cost.
The firm can/will profit maximize where Marginal Revenue (MR) = Marginal Cost (MC).
Since the perfectly competitive firm is a price taker P=MR. Therefore, the profit maximizing condition can be written MR=MC or P=MC (Same Condition).
If MR > MC then Increase Output.
If MC > MR then Decrease Output.
Model: Section 12.3
Finding the Profit Maximizing Level of Output Model:
3. Short – Run Analysis:
Determine if the firm is generating economic profits, economic losses, or Zero economic profits.
NOTE: cost curves include both implicit + explicit costs + can therefore be used to determine economic profits or losses.
4 Step Process:
1. Determine the profit maximizing level of output (where MR=MC).
2. Calculate total revenue = Price x Quantity
3. Calculate total cost = ATC x Quantity (ATC is always U Shaped)
4. Compare TR + TC
If TR > TC then Econ. Profits
If TC > TR then Econ. Losses
If TR = TC then Zero Econ. Profits
5. Models on next page. Section 12.4:
1. Characteristics of competitive markets (3):
There must be many buyers and sellers, none of whom can have a large market share, a few players cannot dominate the market.
Firms must produce a standardized product, buyers must see all their products as equivalent. (Identical (Homogenous) Products).
Firms and resources are typically fully mobile, allowing free exit and entry.
These three conditions make all consumers and producers price-takers.
Models: Section 12.2
Market Firm
Market Assumptions:
The firm is a profit maximizing firm.
The individual firm can sell all they can at the market price.
Each Individual firm supplies only a small portion of market supply, and therefore can’t manipulate the market price.
The firm is a price-taker: they take the market price as given.
2. Profit Maximization:
The firm will maximize profit at the output level that has the greatest difference between Revenues + Cost.
The firm can/will profit maximize where Marginal Revenue (MR) = Marginal Cost (MC).
Since the perfectly competitive firm is a price taker P=MR. Therefore, the profit maximizing condition can be written MR=MC or P=MC (Same Condition).
If MR > MC then Increase Output.
If MC > MR then Decrease Output.
Model: Section 12.3
Finding the Profit Maximizing Level of Output Model:
3. Short – Run Analysis:
Determine if the firm is generating economic profits, economic losses, or Zero economic profits.
NOTE: cost curves include both implicit + explicit costs + can therefore be used to determine economic profits or losses.
4 Step Process:
1. Determine the profit maximizing level of output (where MR=MC).
2. Calculate total revenue = Price x Quantity
3. Calculate total cost = ATC x Quantity (ATC is always U Shaped)
4. Compare TR + TC
If TR > TC then Econ. Profits
If TC > TR then Econ. Losses
If TR = TC then Zero Econ. Profits
5. Models on next page. Section 12.4: