3 Perfect Competition, Production & Efficiency

Question 1

4 characteristics of perfectly competitive firms

Answer 1

1. Standardized products
2. Many buyers, many sellers
3. Mobile resources
4. Informed buyers and sellers

Question 2

Law of diminishing returns

Answer 2

When some factors of production are fixed, marginal product of variable factor will eventually decline

Question 3

Marginal cost formula

Answer 3

Change in TOTAL COST / change in output

Total cost = fixed + variable

Question 4

2 scenarios when losses in short run

Answer 4

1. Continue to operate
2. Shutdown
   - if revenue (PxQ) < VC
   - if P < ATC

(will still incur FC)

Question 5

Average variable/total cost formula

Answer 5

AVC = VC/Q

ATC = TC/Q

Question 6

When making decision, compare economic profit (calculate) with next best alternative

Economic profit formula

Answer 6

Revenue - Explicit cost - Implicit cost

Question 7

Invisible hand theory (price)?
2 functions of prices?

Answer 7

Individuals act in own interest which results in most efficient allocation of resources

Rationing function: distribute to those who value most

Allocative function: directs resources away from overcrowded to underserved markets

Question 7

In the long run, all perfectly competitve firms can only earn _ profit

Answer 7

Normal profit : zero economic profit (every firm is a price taker - alw take price at equilibrium)