ECONOMICS CHAPTER 7

• Break-even point

  the state when a firm's total revenue just equals its total cost
• Economic profits

  the difference between the net income of the firm and the opportunity cost of the inputs used; also known as economic value added
• Long run

  a sufficiently long period of time wherein a firm can complete all desired input adjustments; new firms can enter the market and existing firms can depart
• Long-run equilibrium

  the condition when the firm has neither incentive nor opportunity to change what it is doing; it is when there is no more economic profits to be had nor any losses to be incurred
• Marginal cost

  the additional cost incurred when additional units of output are produced
• Marginal revenue

  the additional revenue obtained by putting the additional units of output in the market
• Profits

  pure surplus or an excess of total receipts over all costs of production incurred by a firm
• Pure competition

   a market wherein there is a large number of buyers and sellers of a commodity, each too small to affect price, where outputs of all firms in the market are homogeneous, and where there is perfect mobility of resources
• Short run

  a time period in which a firm can vary its output but does not have time to change its plant size and the number of firms in an industry is fixed because new firms do not have time to enter and existing firms do not have time to leave
• Shutdown price

  the price that would force the producer to stop production because of losses; it is when the market price is less than the minimum average variable costs
• A market is said to be perfectly competitive if it contains all the characteristics of pure competition plus an additional characteristic, i.e., consumers, resource owners, and firms in the market have perfect knowledge of present and future prices and costs.
• Perfect knowledge

  means that a person knows the price of a commodity being charged in the markets
• as revenues are greater than costs, the firm receives profits; if costs are greater than revenues, the firm is operating at a loss.
• Economic profits can be obtained by firms in the industry only if the market price is greater than the short-run average cost (SAC).
• Efficient Allocation of Resources

  • First, firms would be forced to produce goods which consumers want most.
  • Second, the presence of competition forces firms to use the most efficient or least-cost methods in the production of goods.
• Perfect competition allocates resources toward the efficiency and equity that most satisfy society's needs and wants.
• oversupplied means lower price and undersupplied means higher price
• where price is lower (surplus) instead of where price is usually higher (scarcity).
• Characteristics of a purely competitive market:

  1. large number of sellers and buyers of the commodity

  2. homogeneous products

  3. Firms are free to enter into and exit from the industry.
• The maximum total profit of the firm is where the positive difference between total revenue and total costs is at its greatest. The equilibrium output of the firm is the output at which total profits are at maximum.
• Merits of a purely competitive market:

  1. Increase in output for the economy, here- by giving the consumers more choices

  2. Lower prices because of the entry of more firms in the industry

  3. Most efficient allocation of resources
• Shortcomings of a purely competitive market:

  1. Allocation of resources will benefit the rich more than the poor.

  2. Spillover or external benefits and costs to society are not accounted for.