Perfectly competitive markets: individual firms have no influence over the market prices of the

products they sell. These firms are considered price takers. Both buyers and sellers believe that
their own actions have no effect on the market price.

Imperfectly competitive firm: firm that has at least some control over the market price of its
product.

Characteristics of perfectly competitive markets:

 All firms sell the same standardized product.
 The market has many buyers and sellers.
 Productive resources are mobile.
 The access to the market information is easy.

The relationship between the individual and market supply curves for a product is the same to the
relationship between the individual and market demand curves.

The quantity that corresponds to a given price on the market demand curve is the sum of the
quantities demanded at that price by all individual buyers in the market.

The quantity that corresponds to a given price on the market supply curve is the sum of the
quantities supplied at that price by all individual sellers in the market.

The demand curve facing a perfectly competitive firm is perfectly

elastic at the market price.

Factors of production: an input used to produce goods and

services.

Short run: a period of time during which at least some of the

firm’s factors of production cannot be varied (are fixed).

Long run: a period of time sufficiently long that all the firm’s
factors of production atr variable.

Fixed factor of production: an input whose quantity can not be altered in the short run.

Variable factor of production: an input whose quantity can be altered in the short run.

Fixed cost: the sum of all payments made to the firm’s fixed factors of production (leases, rent).

Variable cost: the sum of all payments made to the firm’s variable factors of production (wages).

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Total cost: the sum of all payments made to the firm’s fixed and variable factors of production.

Marginal cost: the change in total output (∆Q) resulting from using an extra unit of labor (∆L)
holding other factors constant.

Law of diminishing returns: successive increases in labor input (variable factor) yield smaller and
smaller increments in output.

Shutdown condition:
In the short run, a firm would fo best by producing and selling the output level for which

Price (P) = Marginal Cost (MC).

Short run shutdown condition:

P ×Q<VC where P ×Q is the total revenue (TR) and VC is variable cost.

We cen rewrite it as :

P × Q VC
<
Q Q

P< AVC

Average variable cost: the variable cost divided by total output.

Average total cost: the total cost divided by total output.

Profitable firm is the firm whose total revenue P ×Q exceeds its total cost (TC)