05 Perfect Competition

Question 1

Productivity

Answer 1

Can be measured by looking at the time it takes a worker to produce good

Question 2

As price increases, firms in a perfectly competitive market find…

Answer 2

It is beneficial to produce more units of output because price now equals marginal cost at a higher level of output.

Question 3

Average variable cost (AVC)

Answer 3

AVC = VC / Q

Question 4

Average total cost (ATC)

Answer 4

ATC = TC / Q

Question 5

Profit =

Answer 5

Total revenue - total cost (total cost includes implicit and explicit costs)

Question 6

Principle of increasing opportunity cost

Answer 6

Once all factors of production are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

Question 7

Market supply and market demand set the price

Answer 7

Buyers and sellers are price takers

Question 8

Imperfectly competitive firms have..

Answer 8

Some control over price

Question 9

Production

Answer 9

Converts inputs into outputs

Question 10

A factor of production

Answer 10

An input used in the production of a good or service

Question 11

Short run

Answer 11

Period of time when at least one of the firm’s factors of production is fixed

Question 12

Long run

Answer 12

Period of time in which all inputs are variable

Question 13

Law of diminishing returns

Answer 13

When some factors of production are fixed and there is an increase in the production of a good, a larger increase in variable factors are required

Question 14

Fixed cost (FC) aka capital cost

Answer 14

Sum of all payments for fixed inputs

Question 15

Variable cost (VC)

Answer 15

Sum of all payments for variable inputs

Question 16

Total cost

Answer 16

Sum of all payments for all inputs (fixed + variable)

Question 17

Marginal cost

Answer 17

Change in total cost divided by the change in output (MC = ^TC / ^Q)

Question 18

Marginal revenue

Answer 18

= price x additional

Question 19

Increase output if..

Answer 19

Marginal benefit is at least as great as marginal cost

Question 20

Decrease output if..

Answer 20

Marginal benefit is greater than marginal cost

Question 21

Total Revenue

Answer 21

TR = P*Q

Question 22

Profit

Answer 22

TR-TC

Question 23

Shut down if…

Answer 23

Revenue is less than variable cost (P*Q < VC or P < AVC)

Question 24

Profitable if..

Answer 24

Total revenue > total cost

Question 25

Losses

Answer 25

(ATC - P) *Q

Question 26

Profit on graph

Answer 26

Area of rectangle with height (P-ATC) and width Q

Question 27

Losses on graph

Answer 27

Area of rectangle with height ATC-P and width Q

Question 28

The perfectly competitive firm’s supply curve..

Answer 28

Is its marginal cost curve (at every quantity on market supply curve, price is equal to seller’s marginal cost of production)

Question 29

Producer surplus

Answer 29

The difference between the market price and the seller’s reservation pri (above supply curve and below market price)

Question 30

When the price of a similar good increases..

Answer 30

Firms have an incentive to produce more of the now higher-priced good.

Question 31

Profit maximisation rule

Answer 31

A firm should continue to produce output as long as price is at least as great as marginal cost

Question 32

FC

Answer 32

= TC - VC