8: Perfect Competition and Partial Equilibrium

Question 1

long run

Answer 1

length of time when all costs are variable

not a set length of time, different in different contexts

Question 2

free entry and exit assumption of perfect competition

Answer 2

entry of new firms when there is profit to be made, exit by firms making losses

wave of entry and exit push the price down and up

in the long run, firms make 0 profit with no entry and exit
p = MC = min AC

Question 3

why does a profit-maximising firm produce at the point where p=MC?

Answer 3

price is fixed in a perfectly competitive industry and taken as given by the producer

MR for a producer is p in this industry

profit-maximising firm produces where MR=MC (from calculus of profit maximisation) so p=MC

Question 4

perfectly inelastic demand curve

Answer 4

vertical so any response to supply shock is through price with the same quantity

Question 5

relationship between PED and size of change in price

Answer 5

more elastic demand means a smaller price response in market equilibrium after a shift in supply

Question 6

what happens when the price ceiling is above equilibrium price?

Answer 6

ceiling has no effect on equilibrium

remain at original price and quantity

Question 7

price and optimal choice in a perfectly competitive industry

Answer 7

at optimal choice (p=MC), p>AC if they make a positive profit in the short run

in the long run, entrance/exit leads the price to be at the level where economic profit is 0 (p=AC)

Question 8

when do firms make positive profit in the short run?

Answer 8

P > AC

Question 9

when do firms make negative profit in the short run?

Answer 9

P < AC

Question 10

utilitarian SWF

Answer 10

considers sum of wellbeing to be paramount

ethics that accept someone being hurt by some amount as long as another person benefits by a greater amount

Question 11

minimax SWF

Answer 11

considers wellbeing of the least well off to be paramount

ethics that say that some change makes society better off only if it makes the person with the least utility better off

Question 12

perfectly competitive markets

Answer 12

price-takers

homogenous goods

perfect information

free entry and exit in the long run

Question 13

consumer surplus

Answer 13

how much consumers value the goods they get over and above the price they had to pay to get them

Question 14

producer surplus

Answer 14

how much producers value the sales they made over and above the price they received for them

Question 15

tax

Answer 15

price a consumer pays is not the same as the price a producer receives

pD=pS+t

Question 16

Arrow’s impossibility theorem

Answer 16

no aggregation mechanism can satisfy all:
- taking complete/transitive/reflexive individual preferences and returning complete/transitive/reflexive social ordering
- if everyone prefers a to b, social ordering should rank a over b
- social ordering of a and b should only depend on how individual preferences rank a and b, not on their ranking of an alternative c or other information
- social ordering should not coincide with any individual preference