FIRMS IN COMPETITIVE MARKETS You should understand:
KEY POINTS:
I. What Is a Competitive Market?
D. The Firm’s Long-Run Decision to Exit or Enter a Market
Monopoly KEY POINTS:
Be sure you know what a monopoly is and why they can remain a monopoly. What are the barriers to entry and what are some real-world examples? What is a natural monopoly? Be able to compare the monopoly situation to perfect competition: price, demand, marginal cost, marginal revenue, welfare, and etc. How should we regulate monopolies? Know the graphs! What will cause a monopoly to shut down in the short run?Monopoly Market Structure Shutdown Point
In the short run, a monopolist market structure shutdown point is reached when average revenue (price) is below average variable cost (AVC) at every output level. In such a case, it means that the demand curve is completely below the average variable cost curve.
When should a monopolistic firm shut down?A monopolist should shut down when price (average revenue) is less than average variable cost for every output level; in other words, it should shut down if the demand curve is entirely below the average variable cost curve.
Does shut down rule apply to monopolistic competition?MONOPOLISTIC COMPETITION, SHUTDOWN: A monopolistically competitive firm is presumed to minimize economic losses by shutting down production, if price is less than average variable cost in the short run. This is one of three short-run production alternatives facing a firm.
What happens when a competitive firm shuts down in the short run?The minimum point on the average variable cost curve is called: The shutdown point. If a firm shuts down in the short run: Its loss equals its fixed cost.
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