3.1: perfectly competitive markets Flashcards
1
Q
3 main assumptions of PCMs?
A
1) Price takers
2) Product homogeneity
3) Free entry and exit
2
Q
Why are firms/consumers in PCMs price takers?
A
- Each firm has v small share of total market output tf can’t influence price
- Each consumer (/firm buying into a PCM) buys too small share of industry output tf can’t influence price
3
Q
Read PCM assumptions bit
A
now
4
Q
How are market price and output determined for a firm in PCM?
A
By total market D and S
5
Q
How is the market demand curve in a PCM made?
A
It is the sum of individual consumers’ demand curves
6
Q
See firm vs industry demand and supply diagrams?
A
Now
7
Q
When should firms exit a PCM? (2)
A
SR if price
8
Q
What is the optimal 0 production/shut down rule?
A
If profits from producing nothing (inc. paying fixed costs) are greater than profits of producing any positive output level, the firm should leave the market
