Chapter 10: Pure Competition

Question 1

what does Market Structure refer to?

Answer 1

Market structure refers to the characteristics of an industry that define the likely behavior and performance of its firms.

Question 2

What is Imperfect Competition?

Answer 2

imperfect competition refers to all market structures except pure competition.

Question 3

What are the Characteristics of Pure Competition?

Answer 3

-Very large numbers of sellers​

-Standardized product​: a product for which all other products in the market are identical and thus are perfect substitutes. The consequence of this is that buyers are indifferent as to whom they buy from

-“Price takers”​: sellers that have no pricing power; in other words, they do not have the ability to price their product.

-Free entry and exit​

Question 4

What does it mean when a firm has a Purely Competitive Demand?

Answer 4

Perfectly elastic demand:​
-Firm produces as much or little as they wish at the market price.​

Demand graphs as horizontal line at the price. ​

Question 5

What do a Purely Competitive Firm’s Demand and Revenue Curve look like?

Answer 5

This graph shows a purely competitive firm’s demand curve and revenue curves. The demand curve (D) of a purely competitive firm is a horizontal line (perfectly elastic) because the firm can sell as much output as it wants at the market price (here, $131). Because each additional unit sold increases total revenue by the amount of the price, the firm’s total-revenue (TR) curve is a straight upsloping line, and its marginal-revenue (MR) curve coincides with the firm’s demand curve. The average-revenue (AR) curve also coincides with the demand curve.

Question 6

What is Average Revenue (AR) and it’s the formula?

Answer 6

Revenue per unit​

AR = TR/Q = P​

Question 7

What is Total Revenue (TR) and what is the formula for it?

Answer 7

Total Revenue refers to the total amount of money that the firm collects for the sale of all of the units of their good.

TR = P × Q​

Question 8

What is Marginal Revenue and its formula?

Answer 8

Marginal revenue reflects the additional revenue that the firm will receive by producing one more unit of output.

MR = ΔTR/ΔQ​

Question 9

In Pure Competition what are equal?

Answer 9

Marginal Revenue (MR) and Price (P)

Question 10

What is Profit Maximization:

Answer 10

When the purely competitive firm attempts to maximize its economic profit (or minimize its economic loss) by adjusting its output.

Question 11

What is the Break -Even Point?

Answer 11

The break-even point is an output at which a firm just makes a normal profit, Total Revenue (TR) = Total Costs (TC).​

Question 12

What does Profit Maximization in the Short Run tell us based on the TR - TC Approach, and when will a firm maximize profits and continue to produce?

Answer 12

The firm’s profit is maximized when total revenue, TR, exceeds the total cost, TC, by the maximum amount. That amount will be the Maximum Econmoic Proft at the # of units produced. The vertical distance between TR and TC is plotted as a total economic profit curve.​

Question 13

What does Profit Maximization in the Short Run tell us based on the MR=MC Approach?

Answer 13

The MR = MC rule is the principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost.

Question 14

In Profit Maximization for Pure Competiton ONLY, the MR=MC approach can also be stated as what? Why?

Answer 14

P=MC
Because the demand schedule faced by a competitive seller is perfectly elastic at the going market price, product price and marginal revenue are equal. So, under pure competition (and only under pure competition), we may substitute P for MR in the rule: When producing is preferable to shutting down, the competitive firm should produce at the point where price equals. (pg 202)

Question 15

What are the 3 questions a firm must answer in regard to Profit Maximization in the Short Run?

Answer 15

1. whether or not the firm should produce at all in the short run. In the short run, the firm should shut down under certain circumstances.
2. If it has been determined that the firm should produce in the short run, then the firm must determine how much to produce.
3. Lastly, based on the answers to the first two questions, it is necessary to calculate the profit or loss for the firm. We recognize that part of the profit-maximization rule is producing an output that minimizes losses in the short run when that is the best option.​

Question 16

When does a firm shut down in the Short Run based on the MR=MC approach

Answer 16

If marginal revenue does not equal or exceed average variable cost, the firm will shut down rather than produce.

Question 17

What is Profit Maximization Output in the TR- TC approach?

Answer 17

It is every unit of output up to and including the unit representative of the total revenue, TR, exceeding the total cost, TC, by the maximum amount. The unit after the Profit Maximzation output, however, should not be produced. It would add more to cost ($150) than to revenue ($131). So 9 units is the profit-maximizing output. (Pg 203)

Question 18

What is Profit Maximization Output in the MR=MC approach?

Answer 18

Compare MC and MR at each level of output. The firm should continue to expand output as long as MR is greater than MC. The firm will maximize profits by producing the last unit of output where MR still exceeds the MC, up to where MR = MC. Since the tenth unit’s MC > MR, 9 units is the profit maximizing output.​

Question 19

What is the formula for Total Economic Proft?

Answer 19

Profit Maximization Output # * (P-ATC)

Question 20

What is Loss-Minimizing Case?

Question 21

If price, P, exceeds the minimum AVC but is less than ATC at the MR = MC output, what will happen to the firm, will they continue to produce or shutdown?

Answer 21

then the firm will incur losses, but it will produce.

Question 22

If price P falls below the minimum AVC what should the competitive firm do?

Answer 22

It will minimize its losses in the short run by shutting down.

Question 23

why does a competitive firm continue to produce instead of shutting down?

Answer 23

the loss from producing is smaller than the loss if the firm shutdowns, so this is the firm’s best choice.

Question 24

When comparing MC and MR at each level of output. The firm should continue to expand output as long as what?

Answer 24

MR (in other words P) is greater than MC.

Question 25

When are losses at a minimum?

Answer 25

The firm will minimize losses by producing the last unit of output where MR still exceeds the MC, up to where MR = MC. Since the seventh unit’s MC > MR, 6 units is the loss-minimizing output. ​

Question 26

What is the formula for Total Loss?

Answer 26

Loss Minimizing Output * (P - ATC)

Question 27

What is the Supply Graph for purely competitive firm drawn?

Answer 27

It is an upsloping line. The segment of the firm’s marginal cost curve that lies above the Average Variable Cost (AVC) curve is the firm’s short-run supply curve.​

Question 28

When should a competitive firm continue to produce?

Answer 28

When price P is equal to, or greater than, the minimum Average Variable Cost (AVC). This means that the firm is profitable or that its losses are less than its fixed cost.​

Question 29

At what quantity should a firm continue to produce?

Answer 29

Produce where MR (= P) = MC; there, profit is maximized (TR exceeds TC by a maximum amount) or loss is minimized.​

Question 30

When will production result in economic profit?

Answer 30

If price exceeds the Average Total Cost (ATC) , (so that TR will exceed TC).

Question 31

When will production result in economic loss?

Answer 31

If Average Total Cost (ATC) exceeds price (so that TC exceeds TR).​

Question 32

Firm and Industry: Equilibrium Price​

Answer 32

The market equilibrium condition is where the quantity demanded equals the quantity supplied. Notice, that the industry demand curve is a typical, downward-sloping demand even though, for the firm, the demand curve is perfectly elastic and horizontal.​

Question 33

How do you determine the equilibrium price and output?

Answer 33

we must compare the total supply data with the total demand data and find where they are the same.

Question 34

In the Long Run in Pure Competition firms can do what?

Answer 34

-Firms can enter or exit the industry.​

-Firms can expand or contract capacity​

Decisions are based on the incentives of profits or losses.​

Question 35

In the Long Run what will occur to production and what will price equal?

Answer 35

Production will occur at firm’s minimum average total cost.​

Price will equal minimum average total cost

Question 36

What is Productive efficiency?

Answer 36

Productive efficiency is producing goods in the least costly way.
Producing where P = minimum ATC.​

Question 37

What is Allocative efficiency?

Answer 37

Allocative efficiency is producing the mix of goods most desired by society.

Producing where P = MC.​

Question 38

Dynamic Adjustments​: Purely competitive markets will automatically adjust to what?

Answer 38

-Changes in consumer tastes.​

-Resource supplies.​

-Technology.​

-Recall the “invisible hand.”​

Question 39

Technological Advance and Competition​: Entrepreneurs would like to increase profits beyond just a normal profit:​

Answer 39

-Decrease costs by innovating​

-New product development​

Question 40

What is Creative Destruction?

Answer 40

Competition and innovation may lead to creative destruction.​

Creation of new products and methods may destroy the old products and methods.​