CH8: Market Structures Flashcards
Why is the LRAC curve smooth in theory?
Because it envelops an infinite number of SRAC curves.
What are the four standard market structures?
Perfect competition, monopoly, monopolistic competition, and oligopoly.
What is the shut-down rule in the short run?
Produce only if total revenue ≥ total variable cost or if price (AR) ≥ AVC.
What is the shut-down rule in the long run?
Produce only if total revenue ≥ total cost.
What is the profit-maximizing condition for any firm?
Marginal Revenue (MR) = Marginal Cost (MC).
What should a firm do if MR > MC?
Increase output.
What happens when MR = MC?
Profit is maximized (or losses minimized).
What does perfect competition assume about price control?
Firms are price takers; they cannot influence market price.
What does the firm’s demand curve look like in perfect competition?
Horizontal (perfectly elastic) at the market price.
In perfect competition
what is the relationship between AR, MR, and Price?,AR = MR = Price.
Under perfect competition
how does a firm maximize profit?,By producing the quantity where P = MC.
When does a firm earn economic profit under perfect competition?
When AR > AC.
When does a firm break even (normal profit)?
When AR = AC.
When does a firm incur an economic loss?
When AR < AC.
Should a firm with AR < AC but AR > AVC shut down?
No. It should continue in the short run to cover some fixed costs.
Should a firm with AR < AVC shut down?
Yes. It should shut down immediately in the short run.
What is the firm’s supply curve under perfect competition?
The portion of its marginal cost (MC) curve above AVC.
Why does the supply curve slope upward?
Due to increasing marginal cost, which results from diminishing marginal returns.
How is the market supply curve derived?
By summing all firms’ individual supply curves horizontally.
What happens when firms earn economic profits in the short run?
New firms enter the market, increasing supply and lowering price.
What happens when firms incur losses in the short run?
Firms exit the market, reducing supply and increasing price.
When is long-run equilibrium reached in perfect competition?
When P = MC = AC and only normal profits are earned.
Why would a firm expand its scale of production?
To realise economies of scale and reduce average cost.
What is the long-run equilibrium condition when economies of scale exist?
P = SRMC = SRAC = LRAC
