Page 620 - Krugmans Economics for AP Text Book_Neat

14. In a perfectly competitive market all firms are 16. Many industries are oligopolies: there are only a few
price-taking firms and all consumers are price-taking sellers. Oligopolies exist for more or less the same rea-
consumers—no one’s actions can influence the market sons that monopolies exist, but in weaker form. They
price. Consumers are normally price-takers, but firms are characterized by imperfect competition: firms
often are not. In a perfectly competitive industry, compete but possess some market power.
every firm in the industry is a price-taker. 17. Monopolistic competition is a market structure
15. There are two necessary conditions for a perfectly com- in which there are many competing firms, each pro-
petitive industry: there are many firms, none of which ducing a differentiated product, and there is free
has a large market share, and the industry produces entry and exit in the long run. Product differentiation
a standardized product or commodity—goods that takes three main forms: by style or type, by location,
consumers regard as equivalent. A third condition is and by quality. The extent of imperfect competition
often satisfied as well: free entry and exit into and can be measured by the concentration ratio, or the
from the industry. Herfindahl-Hirschman Index.

Key Terms

Explicit cost, p. 530 Fixed cost, p. 548 Perfectly competitive market, p. 568
Implicit cost, p. 530 Variable cost, p. 548 Perfectly competitive industry, p. 569
Accounting profit, p. 531 Total cost, p. 548 Market share, p. 569
Economic profit, p. 532 Total cost curve, p. 549 Standardized product, p. 569
Implicit cost of capital, p. 532 Average total cost, p. 552 Commodity, p. 569
Normal profit, p. 534 Average cost, p. 552 Free entry and exit, p. 570
Principle of marginal analysis, p. 537 U-shaped average total cost curve, p. 553 Monopolist, p. 571
Marginal revenue, p. 537 Average fixed cost, p. 553 Monopoly, p. 571
Optimal output rule, p. 537 Average variable cost, p. 553 Barrier to entry, p. 571
Marginal cost curve, p. 538 Minimum-cost output, p. 555 Natural monopoly, p. 571
Marginal revenue curve, p. 538 Long-run average total cost curve, p. 561 Patent, p. 572
Production function, p. 542 Economies of scale, p. 562 Copyright, p. 572
Fixed input, p. 542 Increasing returns to scale, p. 562 Oligopoly, p. 573
Variable input, p. 542 Diseconomies of scale, p. 562 Oligopolist, p. 573
Long run, p. 542 Decreasing returns to scale, p. 563 Imperfect competition, p. 573
Short run, p. 542 Constant returns to scale, p. 563 Concentration ratios, p. 573
Total product curve, p. 543 Sunk cost, p. 563 Herfindahl–Hirschman Index, p. 573
Marginal product, p. 543 Price-taking firm, p. 568 Monopolistic competition, p. 575
Diminishing returns to an input, p. 545 Price-taking consumer, p. 568

Problems

1. Hiro owns and operates a small business that provides eco- 2. Jackie owns and operates a Web-design business. Her comput-
nomic consulting services. During the year he spends $55,000 ing equipment depreciates by $5,000 per year. She runs the busi-
on traveling to clients and other expenses, and the computer ness out of a room in her home. If she didn’t use the room as her
that he owns depreciates by $2,000. If he didn’t use the com- business office, she could rent it out for $2,000 per year. Jackie
puter, he could sell it and earn yearly interest of $100 on the knows that if she didn’t run her own business, she could return
money created through this sale. Hiro’s total revenue for the to her previous job at a large software company that would pay
year is $100,000. Instead of working as a consultant for the her a salary of $60,000 per year. Jackie has no other expenses.
year, he could teach economics at a small local college and a. How much total revenue does Jackie need to make in order
make a salary of $50,000. to break even in the eyes of her accountant? That is, how
a. What is Hiro’s accounting profit? much total revenue would give Jackie an accounting profit
b.What is Hiro’s economic profit? of just zero?
c. Should Hiro continue working as a consultant, or should b. How much total revenue does Jackie need to make in order for
he teach economics instead? her to want to remain self-employed? That is, how much total
revenue would give Jackie an economic profit of just zero?

578 section 10 Behind the Supply Curve: Profit, Production, and Costs