Firms
A firm is an organization that produces goods or services. The
terms firm, company, and business are used interchangeably.
In the U.S., about 80% of all firms are sole proprietorships,
with one owner, or partnerships, with only a few owners. A
corporation is unlike a sole proprietorship or partnership in that
the directors are usually somewhat removed from the owners.
The firm used in this chapter is typical of many small firms
and has features that apply to larger firms as well: the firm is
one with a single product (pumpkins) and two factors of
production, land (the patch) and labor (the workers). One of
the factors of production, land, cannot be changed during the
season (in the short term) because the rent was already paid.
This makes land a fixed factor . The other factor, labor, can be
varied in the short term because you can choose to hire more or
less workers. This makes labor a variable factor .
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A Firmas a Price-Takerin a CompetitiveMarket
Because a firm takes the price (eLf or a product in the market as
a given, we say that the firm is a price-taker . A single firm does
not set the price for a product in a market . The price that
prevails in the market is the price that both the buyer and seller
both agree is good for them (the equilibrium price (Pe). This
type of market is called a competitive market because a single
firm cannot choose or affect the market price; it is competitive
for all of the firms in the market. All of the firms as a whole
eventually determine the market price and equilibrium quantity
(Qe).
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A Firmas a Price-Takerin a CompetitiveMarket
(cont.)
A perfect or pure competition market is more specific. It is a
market structure in which 1) all firms sell an identical product,
2) all firms are price-takers, 3) buyers have complete
information about the product being sold and the prices charged
by each firm, 4) the industry is characterized by freedom of
entry and exit by firms, 5) no long-run (LR) profits exist, and 6)
the market is efficient. In this type of market, firms not only
have productive efficiency (when firms produce the quantity
(Q) at the minimal average total cost (ATC)) but also allocative
efficiency (when firms produce the optimal quantity that society
wants, P==MC).
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A Firmas a Price-Takerin a CompetitiveMarket-?s
12. Which f the f II wing i tru fa p rfectly
co1npetitive firn1 in Jong-run quilibrium?
A) It produce it output at minimun1 av rage
B)
(C)
D)
E)
total c t.
It earn po itive econon1ic profits.
It will exit the indu try.
It pric exc eds marginal co t.
It pric exc d marginal rev nue.
20. A perlectly cornpetitive market in equilibrium
i allocatively efficient and it maximize
(A) total con umer urplu
(B total producer urplu
(C) the um of total con umer urplu and total
producer urplus
(D) total revenue
E total external benefit
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A Firmas a Price-Takerin a CompetitiveMarket-?s
12. Which f the f II wing i tru fa p rfectly
co1npetitive firn1 in Jong-run quilibrium?
• ) It produce it output at minimun1 av rage
B)
(C)
D)
E)
total c t.
It earn po itive econon1ic profits.
It will exit the indu try.
It pric exc eds marginal co t.
It pric exc d marginal rev nue.
20. A perlectly cornpetitive market in equilibrium
i allocatively efficient and it maximize
(A) total con umer urplu
(B total producer urplu
the um of total con umer urplu and total
producer urplus
(D) total revenue
E total external benefit
c•)
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