Ch. 23: Perfect Competition - Assignment Essays

question

Market Structure: ____ features of a market that effect the _______ and ________ of the firms within the market

answer

all; behavior; performance

# of sellers, extent of info, entry barriers, and product differentiation

question

Why is market structure important?

answer

Predict:
-firm behavior
-output
-efficiency
-price cost margins

question

Market Power

answer

when the firm can influence the price of the product or the terms in which the product is sold

question

In a competitive market, _____ ____ will have market power

answer

each firm

question

In a non-competitive market, the ______ _______ will have market power

answer

individual firm

question

Perfect Competition

answer

a market structure in which the decisions of individual buyers and sellers have no effect on market price

question

Perfectly Competitive Firm

answer

firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells

question

Price Taker is a _________ firm that must take the _______ of its product as given because the firm __________ influence its _________

answer

competitive; price; cannot; price

question

Is a Perfect Competitor a Price Taker? Why/Why not?

answer

Yes;

1) large number of buyers and sellers
2) homogenous products (wheat,corn)

question

Free entry means that _______ can start a firm in the industry

answer

anyone

question

Free Entry Examples

answer

sandwich shop, sell crafts, photographer, webpage, android apps

question

Entry Barrier Examples

answer

car manufacturing, diamond mining, gasoline production

question

If the perfectly competitive firm is a price taker, selling _________ commodity with ________ substitutes, then the individual firm faces a perfectly _________ demand at the going market price

answer

homogenous; perfect; elastic

question

Demand Curve of the Perfect Competitor (Price Taker)

answer

Perfectly elastic; horizontal line

consumers are sensitive to the firm's price

question

How is the going (market) price established in a competitive market?

answer

by the interaction of all the suppliers and demanders

question

A perfect competitor accepts price if: firm raises price, it sells _______; firm lowers price, it earns _______ profit

answer

nothing; less

question

To decide how much to produce, perfect competitors use the _______ _______ mode

answer

profit-maximization

question

Profit Function

answer

Pi = TR - TC

question

Losses occur when profits are _______

answer

negative

question

Total Revenue Function

answer

TR = P x Q

market chooses P; firm chooses Q

question

Total Cost Function

answer

TC = TFC + TVC

question

To find optimal profit when looking at TR and TC, find the _______ gap between the two where ______ > ________

answer

biggest; TR; TC

question

To find optimal profit using marginal analysis, find the output where ______ = _______

answer

MR; MC

question

Marginal Revenue

answer

change in total revenue divided by the change in output

MR = change in TR/change in Q

question

Marginal Cost

answer

change in total cost divided by the change in output

MC = change in TC/change in Q

question

For a perfectly competitive firm, MR = _______

answer

price

question

In a perfectly competitive market, an individual firm ______ affect the market price, no matter how much it sells. Thus, the additional revenue from selling an additional unit is _______ to that market price

answer

cannot; equal

question

Profit maximization occurs at the output where the ______ between TR and ______ is the _______

answer

gap; TC; biggest

MR=MC

question

For a competitive firm, this means that profit maximization occurs where P = _____ = M__

answer

MR; MC

question

Short run average profits are determined by comparing ______ with ____ at the profit-maximizing ____. In the short run, the perfectly competitive firm can make either economic _______ or economic ________

answer

ATC; P; Q; profits; losses

question

Short Run Profit Equation

answer

pi = q [P - ATC(q*)]

profit equals number of units sold multiplied by the average profit per unit

question

ATC is a ____ shaped function

answer

question

Graph a Firm's SR Profit

answer

p 185

question

MC runs through the __________ of SRATC

answer

midpoint

question

Graph a Competitive Firm making an Economic Loss

answer

p 186

question

As long as the loss from staying in business is _____ than the loss from shutting down, the firm will ________ to produce

answer

less; continue

question

If a firm goes bankrupt, they must ______ EVERYTHING

answer

sell

question

A firm exits the industry when the owner ______ its _______.

answer

sells; assets

question

A firm temporarily shuts down when it ______ _________, but is ______ in business

answer

stops producing; still

question

Short-Run Break Even Price

answer

price at which a firm's total revenue equals its total costs (both implicit and explicit)

P = min ATC

question

A firm will make positive economic profits if P ____ minimum ______

answer

>; ATC

question

A firm will experience negative economic profit (losses) if P ____ minimum _____

answer

<; ATC

question

Short-Run Shutdown Price

answer

price that just covers average variable costs

occurs at the intersection of the MC and AVC

graphically: P = minimum AVC

question

If P < minimum AVC

answer

shutdown is short run -- stop producing

question

If minimum AVC < P < minimum ATC

answer

produce output so p > 0, but have economic losses

question

Graph a Break Even Price and Shutdown Price

answer

p 187

question

Why produce if you are not making a profit?

answer

-may be MORE costly to shutdown
-losses may be temporary

question

When economic profits are zero, a firm can still have positive ______ profits

answer

accounting

question

What do you call the short-run supply curve?

answer

marginal cost curve ; MC

question

Where does the short run supply curve start in a competitive industry?

answer

the MC at and above the intersection with the SRAVC curve

only above the shut down point

question

Where is the break even point?

answer

When P hits the bottom of the SRATC curve

P = min ATC

question

Profits and losses act as a ______ for resources to enter an industry or to leave an industry

answer

signal

question

Signals are compact ways of conveying information to economic _______ makers

answer

decision

question

An effective signal no only conveys _______ but also provides the ________ to react appropriately

answer

information; incentive

question

Economic Profits

answer

signal that tells new competitive firms to enter the market

question

Economic Losses

answer

signal that tells existing firms to exit the market

question

Firms will respond to ________ opportunities

answer

profit

question

Markets have a tendency toward the _________

answer

equilibrium

question

At break-even, resources _______ enter or exit the market

answer

won't

question

In competitive long run equilibrium, firms will make ______ economic profits

answer

zero

question

In the long run, firms enter and leave the industry in response to _______ _________

answer

profit opportunities

question

If Economic Profits in LR are positive:

answer

- new firms will enter
-industry supply will increase (shift right)
-price falls until profits are zero

question

If Economic Profits in LR are negative:

answer

-existing firms will exit the industry
-Industry supply decreases (shifts left)
-price rises until profits are zero

question

LR Equilibrium: In the long run, a firm can ______ the scale of its plant, adjusting the plant size in such a way that it has no further _______ to change; it will do so until profits are ________.

answer

change; incentive; maximized

question

In the long run, a competitive firm produces where P, MR, MC, SR min average cost, and LR min average costs are ________

answer

equal

question

Graph a firm's LR Production

answer

p 190

question

Marginal Cost Pricing: a system of pricing in which the price charged is _____ to the _________ to society of producing one more unit of the good or service in question

answer

equal; opportunity cost

P = MC of the last unit you produced

question

The opportunity cost of production is the _______ to society

answer

MC; marginal cost

question

Allocative Efficiency

answer

level of output where P = MC

question

Allocative Efficiency means that marginal value to consumers _____ the marginal ____ of production. We have produced just the _____ amount.

answer

equals; cost; right

question

Allocative Inefficiency

answer

-wrong amount produced (DWL)
-could mean that P > MC
-often the result of monopoly or externalities

question

The wrong amount produced can create _____

answer

DWL

1 of 72

question

Market Structure: ____ features of a market that effect the _______ and ________ of the firms within the market

answer

all; behavior; performance

# of sellers, extent of info, entry barriers, and product differentiation

question

Why is market structure important?

answer

Predict:
-firm behavior
-output
-efficiency
-price cost margins

question

Market Power

answer

when the firm can influence the price of the product or the terms in which the product is sold

question

In a competitive market, _____ ____ will have market power

answer

each firm

question

In a non-competitive market, the ______ _______ will have market power

answer

individual firm

question

Perfect Competition

answer

a market structure in which the decisions of individual buyers and sellers have no effect on market price

question

Perfectly Competitive Firm

answer

firm that is such a small part of the total industry that it cannot affect the price of the product or service that it sells

question

Price Taker is a _________ firm that must take the _______ of its product as given because the firm __________ influence its _________

answer

competitive; price; cannot; price

question

Is a Perfect Competitor a Price Taker? Why/Why not?

answer

Yes;

1) large number of buyers and sellers
2) homogenous products (wheat,corn)

question

Free entry means that _______ can start a firm in the industry

answer

anyone

question

Free Entry Examples

answer

sandwich shop, sell crafts, photographer, webpage, android apps

question

Entry Barrier Examples

answer

car manufacturing, diamond mining, gasoline production

question

If the perfectly competitive firm is a price taker, selling _________ commodity with ________ substitutes, then the individual firm faces a perfectly _________ demand at the going market price

answer

homogenous; perfect; elastic

question

Demand Curve of the Perfect Competitor (Price Taker)

answer

Perfectly elastic; horizontal line

consumers are sensitive to the firm's price

question

How is the going (market) price established in a competitive market?

answer

by the interaction of all the suppliers and demanders

question

A perfect competitor accepts price if: firm raises price, it sells _______; firm lowers price, it earns _______ profit

answer

nothing; less

question

To decide how much to produce, perfect competitors use the _______ _______ mode

answer

profit-maximization

question

Profit Function

answer

Pi = TR - TC

question

Losses occur when profits are _______

answer

negative

question

Total Revenue Function

answer

TR = P x Q

market chooses P; firm chooses Q

question

Total Cost Function

answer

TC = TFC + TVC

question

To find optimal profit when looking at TR and TC, find the _______ gap between the two where ______ > ________

answer

biggest; TR; TC

question

To find optimal profit using marginal analysis, find the output where ______ = _______

answer

MR; MC

question

Marginal Revenue

answer

change in total revenue divided by the change in output

MR = change in TR/change in Q

question

Marginal Cost

answer

change in total cost divided by the change in output

MC = change in TC/change in Q

question

For a perfectly competitive firm, MR = _______

answer

price

question

answer

cannot; equal

question

Profit maximization occurs at the output where the ______ between TR and ______ is the _______

answer

gap; TC; biggest

MR=MC

question

For a competitive firm, this means that profit maximization occurs where P = _____ = M__

answer

MR; MC

question

answer

ATC; P; Q; profits; losses

question

Short Run Profit Equation

answer

pi = q [P - ATC(q*)]

profit equals number of units sold multiplied by the average profit per unit

question

ATC is a ____ shaped function

answer

question

Graph a Firm's SR Profit

answer

p 185

question

MC runs through the __________ of SRATC

answer

midpoint

question

Graph a Competitive Firm making an Economic Loss

answer

p 186

question

As long as the loss from staying in business is _____ than the loss from shutting down, the firm will ________ to produce

answer

less; continue

question

If a firm goes bankrupt, they must ______ EVERYTHING

answer

sell

question

A firm exits the industry when the owner ______ its _______.

answer

sells; assets

question

A firm temporarily shuts down when it ______ _________, but is ______ in business

answer

stops producing; still

question

Short-Run Break Even Price

answer

price at which a firm's total revenue equals its total costs (both implicit and explicit)

P = min ATC

question

A firm will make positive economic profits if P ____ minimum ______

answer

>; ATC

question

A firm will experience negative economic profit (losses) if P ____ minimum _____

answer

<; ATC

question

Short-Run Shutdown Price

answer

price that just covers average variable costs

occurs at the intersection of the MC and AVC

graphically: P = minimum AVC

question

If P < minimum AVC

answer

shutdown is short run -- stop producing

question

If minimum AVC < P < minimum ATC

answer

produce output so p > 0, but have economic losses

question

Graph a Break Even Price and Shutdown Price

answer

p 187

question

Why produce if you are not making a profit?

answer

-may be MORE costly to shutdown
-losses may be temporary

question

When economic profits are zero, a firm can still have positive ______ profits

answer

accounting

question

What do you call the short-run supply curve?

answer

marginal cost curve ; MC

question

Where does the short run supply curve start in a competitive industry?

answer

the MC at and above the intersection with the SRAVC curve

only above the shut down point

question

Where is the break even point?

answer

When P hits the bottom of the SRATC curve

P = min ATC

question

Profits and losses act as a ______ for resources to enter an industry or to leave an industry

answer

signal

question

Signals are compact ways of conveying information to economic _______ makers

answer

decision

question

An effective signal no only conveys _______ but also provides the ________ to react appropriately

answer

information; incentive

question

Economic Profits

answer

signal that tells new competitive firms to enter the market

question

Economic Losses

answer

signal that tells existing firms to exit the market

question

Firms will respond to ________ opportunities

answer

profit

question

Markets have a tendency toward the _________

answer

equilibrium

question

At break-even, resources _______ enter or exit the market

answer

won't

question

In competitive long run equilibrium, firms will make ______ economic profits

answer

zero

question

In the long run, firms enter and leave the industry in response to _______ _________

answer

profit opportunities

question

If Economic Profits in LR are positive:

answer

- new firms will enter
-industry supply will increase (shift right)
-price falls until profits are zero

question

If Economic Profits in LR are negative:

answer

-existing firms will exit the industry
-Industry supply decreases (shifts left)
-price rises until profits are zero

question

LR Equilibrium: In the long run, a firm can ______ the scale of its plant, adjusting the plant size in such a way that it has no further _______ to change; it will do so until profits are ________.

answer

change; incentive; maximized

question

In the long run, a competitive firm produces where P, MR, MC, SR min average cost, and LR min average costs are ________

answer

equal

question

Graph a firm's LR Production

answer

p 190

question

Marginal Cost Pricing: a system of pricing in which the price charged is _____ to the _________ to society of producing one more unit of the good or service in question

answer

equal; opportunity cost

P = MC of the last unit you produced

question

The opportunity cost of production is the _______ to society

answer

MC; marginal cost

question

Allocative Efficiency

answer

level of output where P = MC

question

Allocative Efficiency means that marginal value to consumers _____ the marginal ____ of production. We have produced just the _____ amount.

answer

equals; cost; right

question

Allocative Inefficiency

answer

-wrong amount produced (DWL)
-could mean that P > MC
-often the result of monopoly or externalities

question

The wrong amount produced can create _____

answer

DWL

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