question
Assumptions of perfect competition
answer
• Many identical firms, each selling an identical product.
• Many buyers.
• No restrictions on entry into the industry.
• Firms already in the industry have no cost advantage over potential new entrants. • Sellers and buyers are well informed about prices of the products of each firm in the industry.
• There are no external costs or benefits and the good is not a public good
• Many buyers.
• No restrictions on entry into the industry.
• Firms already in the industry have no cost advantage over potential new entrants. • Sellers and buyers are well informed about prices of the products of each firm in the industry.
• There are no external costs or benefits and the good is not a public good
question
How perfect Competition Arises
answer
• The typical firm's minimum efficient scale is small relative to market demand
so there is room for many firms in the market.
• Each firm is perceived to produce a good or service that has no unique
characteristics, so consumers don't care which firm's good they buy.
so there is room for many firms in the market.
• Each firm is perceived to produce a good or service that has no unique
characteristics, so consumers don't care which firm's good they buy.
question
Price Takers
answer
A firm that cannot influence the price of its product. It takes the
price as given and beyond its control and simply reacts by deciding how much
output to produce and sell at that price. Perfect competitors.
price as given and beyond its control and simply reacts by deciding how much
output to produce and sell at that price. Perfect competitors.
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Demand facing firms in perfect competition
answer
...
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Industry or market demand in perfect competition
answer
...
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Total Revenue
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The value of a firm's sales PxQ
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Marginal Revenue
answer
The change in the TR from a one unit increase in Q sold. ∆TR/∆Q
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Two decisions of a perfectly competitive firm in a short run
answer
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question
Two decisions of a perfectly competitive firm in a long run
answer
...
question
short run condition for profit maximization
answer
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question
Short-run shutdown decision rule (shutdown point)
answer
If
TR<TVC: Shut down
TR>TVC: Don't shut
TR=TVC: Indifferent btwn shut and not shut
TR<TVC: Shut down
TR>TVC: Don't shut
TR=TVC: Indifferent btwn shut and not shut
question
Short run supply curve (of the firm and industry or market)
answer
shows the quantity supplied by the firm at
each price when the plant size remains constant.
It is the portion of the MC curve lying above minimum AVC Another way to say this is that the firm's short run supply curve is the portion of the MC curve lying above the shutdown point.
each price when the plant size remains constant.
It is the portion of the MC curve lying above minimum AVC Another way to say this is that the firm's short run supply curve is the portion of the MC curve lying above the shutdown point.
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short-run market equilibrium
answer
when the quantity supplied equals the quantity demanded, taking the number of producers as given. They may earn a profit, break even, and incur an economic loss
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Short run profit of a firm
answer
...
question
Three steps for short-run profit analysis
answer
1. Find the output Q such that MR=MC (P=MC for perf competition)
2. Check shutdown condition at the output Q
-If P < min AVC ➡shut down (produce 0 units) - If P = min AVC ➡produce Q* or shut down
- If P > min AVC ➡produce Q*
3. Calculate Economic Profit:
-if produce: Q x (P -ATC)
- if shut down: -TFC
2. Check shutdown condition at the output Q
-If P < min AVC ➡shut down (produce 0 units) - If P = min AVC ➡produce Q* or shut down
- If P > min AVC ➡produce Q*
3. Calculate Economic Profit:
-if produce: Q x (P -ATC)
- if shut down: -TFC
question
Five profit-production scenarios for a firm in
short run (loss-shutdown; loss-indifferent
between shutdown and operate; loss-
operate; breakeven-operate; positive profit-
operate)
short run (loss-shutdown; loss-indifferent
between shutdown and operate; loss-
operate; breakeven-operate; positive profit-
operate)
answer
...
question
Long run competitive equilibrium conditions
for market price and firm profit
for market price and firm profit
answer
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Entry and exit of firms in long run
answer
- If firms are making econ profits, other firms enter the industry
- If firms are making econ losses, some of the existing firms exit the industry
- If firms are making econ losses, some of the existing firms exit the industry
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Changing plant size in long run and impact
on industry supply, market price, firm profit.
on industry supply, market price, firm profit.
answer
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question
"Everything is equal" in long run
competitive equilibrium
competitive equilibrium
answer
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Short run and long run responses to a change in industry demand
answer
...
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Profit is maximized when
answer
-MR=MC (or as close to the condition as the firm can get)
-MC is increasing
-MC is increasing
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Short run loss of a firm
answer
...
question
Distance between ATV and AVC
answer
is the AFC
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Entry and exit of firms in long run IMPACT on industry supply curve, market
price, firm profit.
price, firm profit.
answer
...
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