7.1 & 7.2 Perfect Competition Flashcards
what dsitinguies each market
competition
what are the three mechanism degree of competition is seen
number of firms
similarity of product
ease of entry and exit
what occurs the greater degree of competition
- lower equilibrium prcie
greater equilibrium quantity
more efficient allocation of resources
why are economists pro competition
as lowers prices to consumers and has greater efficiency
what are three characteristics of perfect competition
- There are many firms (and consumers)
- Each has negligible fraction of total market share
- No individual firm can affect supply - The firms produce a homogenous (standardised) product
- Perfect substitutes
- No brand loyalty - Free entry and exit in the long run
- No barriers such as patents, copyrights
what is price taker
Each individual firm (as makes up such small part of market) overall market demand and supply conditions sets the price, and each firm must accept that price
in perfect competition, what does MR=, and what elasticity is demand curve
P
perfectly elastic
how to get MR from TR slope
• change in TR/ change in Quantity= MR
how to get MC from TC slop
change in TC/ change in Quantity=
where does profit maximisation occur
• Profit maximisation occurs at MR=MC
what is the supply curve in perfect comp
MC= supply (as MC determines how much willing supply)
what is the profit maximising formula
Profit= (P-ATC) x Q
what are the four short tun positions a firm finds themselves in
- Pure economic profit (P >ATC)
- Normal (zero) ep (P=ATC)
- Economic/ quasi loss (P < ATC, but > AVC)
- Shutdown (P < AVC)
When working out Economic profit, what first thing do
where MC=MR
in quasi loss, will firm continue to produce? why?
will produce in short run
- price still >AVC, // rev will cover variable costs + make some contribution to its fixed (sunk costs)
why does firm shut down when MR < AVC
loss they make on making units > loss made if shut down and had NO variable costs (only paying fixed)
how to work out (besides looking at graph that both ATC and AVC is above MR) to shutdown
- if economic loss is larger than fixed cost area (ATC-P x Q)
why do firms in the long run receive 0 economic profit
positive profit = attracts new entrant increasing market supply and decreasing price
- short run losses= firms exit (firms exiting means supply curve shifts left + price back to normal profits _
when firm enters or exits, what needs to happen to graphs
shift in supply curves
what happens when preference shifts towards good
- demand shift right
- price increase and quantity increase
- firms earn positive profit
- attracts new firms shifting supply to right
- will stop once price= original normal profit
when preference moves toureds good, and both demand and supply shift rights, what happens to toal market output
increases
difference between shut down and exit
Shut Down (to produce nothing for small time)
- Short run
Firms cannot avoid fixed (rent land)
- This fixed= SUNK COST
Exit (leave market)
- Long run
Firms can avoid fixed (i.e. sell land)
- Avoids sunk costs // too
formulas for shut down and when to exit
Firm shuts down if:
TR < VC = P < AVC
Firm exits if:
TR < TC= P < ATC
Where is firms short term supply curve
Firms short run supply curve is portion of marginal cost curve that lies above AVC
where is firms long term supply curve
Firms long run supply curve is portion of marginal cost curve that lies above ATC
