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Summary Econ 2014 Chapter 9
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Summary of 6 pages for the course Economics at SUN (Chapter 9)
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ExtraClassesStb 2014...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Economics 214 summary: Microeconomics
Chapter 9: Perfect Competition
Accounting Profit:
Page | 1
= Total Revenue – Total Expenses – Depreciation
Economic Profit:
= Total Revenue – Total Opportunity Cost of Production
Opportunity Cost of Production:
Opportunity cost of an action is the highest valued alternative foregone. Thus the Opportunity Cost of
Production is the value of the best alternative use of resources that a firm uses in production.
Opportunity cost of production is the sum of the cost of using resources that is:
Bought in the market
Owned by the firm: the opportunity cost of using its own capital is called the implicit rental rate
of capital. The implicit rental rate of capital has two components:
1. Economic Depreciation (fall in the market value of a firm`s capital over a given period)
2. and Forgone Interest (the funds used to buy the capital could have been used for some
other purpose, and in their next best use, they would have earned interest)
Supplied by the firm`s owner:
o Entrepreneurship: Entrepreneurship is the factor of production that organizes a firm and
makes decisions and can be supplied by the owner of the firm or by a hired entrepreneur.
The return to entrepreneurship is called normal profit. Normal profit is the cost of
entrepreneurship and is an opportunity cost of production.
o and/or Labour of owner: The owner of the firm might supply labour but not take a wage.
The opportunity cost of the owner`s labour is the wage income forgone by not taking the
best alternative job and is an opportunity cost of production.
Four conditions for perfect competition:
1. Standardized product: product homogeneity. Firms in market produce identical, or near identical
products. The products of all the firms in the market are perfectly substitutable with one another.
2. Price takers: many firms compete in the market; each firm faces a significant number of direct
competitors for its product. Because each individual firm sells a small proportion of the total
output in the market, its decisions have no impact on the market price. Thus each firm takes the
market price as given.
3. Free entry and exit: on special costs that make it difficult for a firm to enter or exit an industry.
4. Perfect information
Do you struggle with Economics 214? We want to help you succeed. Contact us at queries@extraclassesstb.co.za or
visit our website at www.extraclassesstb.co.za.
, ExtraClassesStb 2014
...Helping you succeed
Onafhanklik van Stellenbosch Universiteit/ Independent of Stellenbosch University
Profit maximization in the short run: (MR = MC)
Max: Profit = TR – TC → π(q) =R(q) – C(q)
Page | 2
=0
→ In order to maximize profit, a firm should produce at the level where MR = MC.
Profit maximization by a firm in a perfectly competitive market:
MR = MC = P
Shut-Down Rule:
The firm should shut down if P < AVC
Short run supply: MC ≥ min AVC
p1 is the shut-down point.
(when price falls below p1, the firm
should shut-down production)
Do you struggle with Economics 214? We want to help you succeed. Contact us at queries@extraclassesstb.co.za or
visit our website at www.extraclassesstb.co.za.
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