Download Chapter Summaries

CHAPTER 23
Profit Maximization
Summary
1. How do firms decide how much to supply?

1. The supply rule for all firms is to supply the quantity at which the firm’s
marginal revenue and marginal cost are equal. §1.a
2. What is a market structure?

2A market structure is a model of the producing and selling environments
in which firms operate. The three characteristics that define market
structure are the number of firms, the ease of entry, and whether the
products are differentiated. §2.a

3A perfectly competitive market is a market in which a very large number
of firms are producing an identical product and entry is easy. §22.a.1

4The demand curve facing a perfectly competitive firm is a horizontal line
at the market price. Price = MR = Demand. §2.a.1

5. A monopoly is a market in which there is only one firm and entry by
others cannot occur. §22.a.2

6. The demand curve of a monopolist is the market demand since there is
only one firm. The demand curve slopes down. Price = Demand > MR.
§2.a.2

7A monopolistically competitive market is a market in which a large
number of firms are producing differentiated products and entry is easy.
§22.a.3

8The demand curve facing a monopolistically competitive firm is
downward sloping because of the differentiated nature of the products
offered by the firm. §22.a.3

9An oligopoly is a market in which a few firms are producing either
differentiated or nondifferentiated products and entry is possible but not
easy. §22.a.4

10The shape of the demand curve facing a firm in an oligopoly depends
on how the firms interact. §2.b

The marginal-revenue curve for all firms except those in perfect
competition is downward sloping and lies below the demand curve. The
marginal-revenue curve for the perfectly competitive firm is the same as
the demand curve, a horizontal or perfectly elastic curve. §2.b
3. What is the difference between economic profit and accounting profit?

12. Accountants measure only the direct costs. Economists measure all
opportunity costs. §3.a

13. Accounting Profit is Total Revenue – Cost of land, labor and capital.
Cost of capital is interest expenses. §3.a

14. Economic profit is Accounting Profit – cost of ownership. §3.a
4. What is the role of economic profit in allocating resources?

15. Economic profit indicates whether resources will remain in their
current activity or will be distributed to a different activity. When
economic profit is positive, all resources including the firm’s investors
and owners are getting paid more than what they could have expected to
get in another activity. Others seeing this will redirect their time and
investments to that activity. Conversely, when economic profit is
negative, all resources are not getting paid their opportunity costs.
Resource owners will take their resources and place them into an activity
promising to pay more. §3.a, 3.b., 3.c.