14 - Firms In Competitive Markets Flashcards
Describe two conditions that characterize perfect competition
Forms can freely enter or exit the market
There is a high degree of information available to buyers and sellers in the market
Buyers and sellers in competitive markets must accept the price the market determines and therefore are said to be
Price takers
Total revenue - Total cost =
Total profit
PxQ=
Total revenue
Average revenue=
Total revenue / Quantity
Marginal Revenue =
Change in Total Revenue / Quantity
What are three features of marginal cost curves?
1) MC is upward sloping
2) ATC is U shaped
3) MC crosses ATC at min of ATC
Why is the price line horizontal?
Because the firm is a price taker
A ______ refers to a short run decision not to produce anything during a specific period of time because of current market conditions
Shutdown
—- refers to a long run decision to leave the market
Exit
—- temporarily have to pay it’s fixed costs whereas a firm that —- the market saves both fixed and variable costs
Shutdowns, exits
When should you shut down in the short run?
If TR<AVC
A —— is a cost that has already been committed and cannot be recovered
Sunk cost
In the long run a firm will exit a market if
TR<ATC
What does the market supply curve reflect when the number of firms in a market is fixed?
The individual firms marginal coat curves
What does price equal in the long run in an entry/exit market?
The minimum of average total cost
T or F The only requirement for a market to be perfectly competitive is for the market to have many buyers and sellers.
F
T or F For a competitive firm, marginal revenue equals the price of the good it sells.
T
T or F If a competitive firm sells three times the amount of output, its total revenue also increases by a factor of three.
T
T or F A firm maximizes profit when it produces output up to the point where marginal cost equals marginal revenue.
T
T or F If marginal cost exceeds marginal revenue at a firm’s current level of output, the firm can increase profit if it increases its level of output.
F
T or F A competitive firm’s short-run supply curve is the portion of its marginal cost curve that lies above its average total cost curve.
F
T or F A competitive firm’s long-run supply curve is the portion of its marginal cost curve that lies above its average variable cost curve.
F
T or F In the short run, if the price a firm receives for a good is above its average variable costs but below its average total costs of production, the firm will temporarily shut down.
F
T or F In a competitive market, both buyers and sellers are price takers.
T
T or F In the long run, if the price firms receive for their output is below their average total costs of production, some firms will exit the market.
T
T or F In the short run, the market supply curve for a good is the sum of the quantities supplied by each firm at each price.
T
T or F The short-run market supply curve is more elastic than the long-run market supply curve.
F
T or F In the long run, perfectly competitive firms earn small but positive economic profits.
T
T or F In the long run, if firms are identical and there is free entry and exit in the market, all firms in the market operate at their efficient scale.
T
T or F If the price of a good rises above the minimum average total cost of production, positive economic profits will cause new firms to enter the market, which drives the price back down to the minimum average total cost of production.
T
