Chapter 11: Perfect Competition Flashcards
Market Structure
The conditions in an industry: number of sellers, how easy or difficult it is for a new firm to enter, and types of products sold
Perfect Competition
Each firm faces many competitors that sell identical products. Free entry/exit into the market. Many buyers available to buy product.
(Hypothetical extreme)
Price Taker
Firm in a perfectly competitive market that must take prevailing market price as given
Example of a market that is similar to Perfect Competition
Agriculture Markets (many competitor firms selling highly similar goods, with many buyers), including roadside produce markets and small organic farmers
In the long run, how do (theoretically) perfectly competitive firms react to profits? Losses?
Profits: increase production
Losses: decrease production
Marginal Revenue
Additional revenue gained from selling one more unit
Shutdown Point
Level of output where the marginal cost curve intersects the average variable cost curve at the minimum point of AVC; if the price is below this point, the firm should shut down immediately
Profit (Equation)
Total Revenue - Total Cost
Price x Quantity) - (Average Cost x Quantity
In a perfectly competitive market, what does the Marginal Revenue (MR) curve look like on a graph of quantity (x axis) vs Marginal Revenue (y axis)
Straight horizon line at the fixed price of the good. It doesn’t change in a perfectly competitive market.
What is the profit-maximizing choice for a perfectly competitive firm?
The point where MR = MC
Marginal Revenue = Marginal Cost
Entry
When new firms enter the industry in response to increased industry profits
Exit
Long-run process of reducing output production in response to a sustained pattern of losses
Long Run Equilibrium
Where all firms earn zero economic profits producing the output level where P = MR = MC and P = ACA
Productive Efficiency
Producing without waste
Allocative Efficiency
Capital is allocated in the market, in a way that is most beneficial to the parties involved. Represents optimal distribution of goods and services to consumers in an economy.
