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Even though a perfect competitor cannot affect the market price for its product, the market price can change, due to factors beyond the control of any one firm. Example 5A: A single corn farmer cannot affect the market price of corn. But changes in the overall demand for corn (e.g. due to a change in export demand or due to increased use of corn for producing ethanol) or changes in the overall supply of corn (e.g. due to the weather) can affect the market price of corn. Example 3 illustrated how the price of corn has changed in recent years. If the market price changes, a perfect competitor will still face a horizontal demand curve for its product. The demand curve will be horizontal at the new market price. Example 5B: If the market price for Percomp Company from Example 4 decreased to $8, Percomp’s demand curve would be horizontal at $8. Profit-Maximization As discussed in Chapter 19, all business firms are assumed to pursue the same chief goal: profitmaximization. A perfect competitor cannot alter the market price for its product to try to achieve profit-maximization. But a perfect competitor can adjust its own production level to try to achieve profit-maximization. It will try to produce according to the profit-maximization rule for producing output. Profit-maximization rule – produce the quantity of output where marginal revenue equals marginal cost. Marginal cost was defined in Chapter 20 as the change in total cost that results from producing an additional unit of output. We saw in Chapter 20 that when production reaches the point of diminishing marginal returns, the marginal cost of production will begin to increase. Marginal revenue is the change in total revenue from selling one additional unit of output. Marginal revenue – the change in total revenue from selling one additional unit of output. To compute marginal revenue, first we compute total revenue for different quantities of output. Total revenue is equal to the selling price of the output multiplied by the quantity sold. Total revenue = Price x Quantity Example 6A: The table below is for Percomp Company, the perfect competitor from Example 4. The table shows price, quantity demanded, total revenue (Price x Quantity), and marginal revenue for Percomp. Notice that marginal revenue is the same as the selling price. For a perfect competitor, marginal revenue always equals market price since the firm can always sell one more unit of output for the same price as all previous units. The firm’s marginal revenue curve will be the same as its demand curve. Percomp Company Price Quantity Demanded Total Revenue Marginal Revenue $10 0 $0 X 10 1 10 $10 10 2 20 10 10 3 30 10 10 4 40 10 10 5 50 10 10 6 60 10 10 7 70 10 10 8 80 10 10 9 90 10 FOR REVIEW ONLY - NOT FOR DISTRIBUTION 21 - 3 Perfect Competition
Example 6B:The table below illustrates the profit-maximization rule (produce the quantity of output where marginal revenue equals marginal cost). Percomp Company, a perfect competitor, produces in a market where the market price is $10. The demand information, marginal revenue, marginal cost, and marginal profit (marginal revenue minus marginal cost) are detailed on the table. The table shows that producing up to the profit-maximizing quantity (6 units) generates positive marginal profit. Producing more than the profit-maximizing quantity (units 7 through 9) generates negative marginal profit. Percomp Company Price Quantity Marginal Revenue Marginal Cost Marginal Profit $10 0 X X X 10 1 $10 $5 $5 10 2 10 6 4 10 3 10 7 3 10 4 10 8 2 10 5 10 9 1 10 6 10 10 0 10 7 10 11 -1 10 8 10 12 -2 10 9 10 13 -3 The graph below shows the demand curve and the marginal cost curve, indicates that marginal revenue is the same as price, and indicates that the marginal revenue curve is the same as the demand curve. The graph also shows that the profit-maximizing quantity of output (where marginal revenue equals marginal cost) is 6 units of output. $13 - 12 - 11 - 10 - Price 9- 8- 7- 6- 5- Z 0 0 1 2 3 4 5 6 7 8 9 Quantity D = P = MR FOR REVIEW ONLY - NOT FOR DISTRIBUTION MC Perfect Competition 21 - 4
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Appendix: Think Like an Economist -
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Answer questions 8. and 9. based on
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___ 25. The extension of unemployme
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Chapter 5 Measuring Total Output: G
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5. Leisure. Leisure time is by defi
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The U.S. is a high per capita GDP c
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Example 17: In “An International
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The simple circular flow diagram be
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___ 3. Which of the following would
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2. Explain what nonproduction trans
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Chapter 6 The Aggregate Market The
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Example 2C: Assume the same facts a
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Example 5B: The price of crude oil
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Price Level Real GDP SRAS AD 2 AD 1
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Appendix: Why the Aggregate Demand
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___ 3. DEF Company can invest in ne
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2. List and explain the two factors
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Chapter 7 Classical Economic Theory
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Notice that the investment demand c
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Long-Run Equilibrium If Real GDP is
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Example 6B: When the economy is in
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Laissez-faire If the economy is sel
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___ 5. According to Say’s Law: a.
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3. On the graph below, draw an aggr
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Chapter 8 Keynesian Economic Theory
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Example 2B: The graph below illustr
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Example 5: Assume that the table be
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Notice on the graph on the previous
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According to Keynesian theory, a ch
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“The General Theory” also inclu
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___ 8. If the consumption function
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3. If the MPC is .667, and investme
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Chapter 9 Fiscal Policy The basic e
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Keynesian Fiscal Policy Theory and
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Example 5A: The federal government
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The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Example 25: In Brazil, about half t
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Study Guide for Chapter 15 Chapter
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___ 13. Among the counterproductive
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4. List four ways that governments
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Chapter 16 International Trade The
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Other Benefits of Free Internationa
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Example 6: The graph below illustra
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competitive disadvantage. But dumpi
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is only 25% as productive as before
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Smith was skeptical of government a
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___ 4. For Country X, what is the o
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___ 18. Frédéric Bastiat’s “P
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4. On the graph below: (1) What is
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Chapter 17 Elasticity We are often
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Example 4A: What is price elasticit
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Example 5A: Gertie’s Gas and Go i
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Example 10A: When the price of Good
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Example 13B: On the graph below, su
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$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -
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In the long run, would the deadweig
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___ 7. The factors that determine w
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Page 306 and 307: Marginal rate of substitution - the
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Page 320 and 321: Corporations also use self-financin
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Page 330 and 331: Chapter 20 Production and Costs The
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Page 336 and 337: Quantity TC MC AFC AVC ATC 0 240 X
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Page 346 and 347: Chapter 21 Perfect Competition The
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Page 354 and 355: Appendix: Perfect Competition in th
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Page 362 and 363: Chapter 22 Monopoly Of the four mar
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Page 378 and 379: Chapter 23 Monopolistic Competition
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Page 384 and 385: Example 9: The Organization of the
Page 386 and 387: Example 12 illustrates the dilemma
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Page 390 and 391: ___ 14. Game theory: a. is a method
Page 392 and 393: Answers for Chapter 23 Fill-in-the-
Page 394 and 395: Chapter 24 Factor Markets The basic
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Since producers will attempt to equ
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2. Differences in nonmoney aspects
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were his strikeouts, walks, and hom
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___ 3. To maximize profits, a produ
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___ 19. According to the book, “M
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Multiple Choice: 1. a. 8. c. 15. d.
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Chapter 25 Labor Unions The primary
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The elasticity of demand for union
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Example 4A: Assume that the graph b
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Notice from the graph in Example 6
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Wage Factory A Quantity of Labor S
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As a cartel, a labor union faces a
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___ 10. For a monopsony: a. there i
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3. The graph below represents a lab
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Chapter 26 Interest, Present Value,
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An increase in expected rates of re
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An asset is valuable because we exp
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Example 13B: General Ordnance prove
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Appendix: Present Value Table One f
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___ 4. An increase in expected rate
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Problems: 1. List and explain the t
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Chapter 27 Market Failure The basic
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External Benefit If a market genera
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Example 2: To encourage the consump
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$100 - 90 - 80 - MSC 70 - $ 60 - 50
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A common good is nonexcludable. Non
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___ 5. What government policy would
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4. Based on the information on the
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Chapter 28 Public Choice and Govern
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Candidates and the Median Voter Mod
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Example 8: According to State and F
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Example 10: When Elvis Presley was
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4. Pessimistic bias. This is the te
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___ 5. An elected official will: a.
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2. If a certain policy will yield s
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Chapter 29 Government Regulation of
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underproduction is the amount that
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micromanagement results in business
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market. They may agree with their c
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Questions for Chapter 29 Fill-in-th
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___ 10. The public interest theory
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4. List the four types of costs imp
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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