Chapter 13 - Perfect Competition Flashcards
What are the characteristics of a competitive market?
- Full information exists
- Buyers and sellers are price takers
- The good or service is standardized
- Firms freely enter and exit the market
Price takers (definition)
a buyer or seller who cannot affect the market price
What is market power?
the ability to noticeably affect market prices
a competitive market: standardized goods
- same characteristics and they are interchangeable
- differentiated by quality, brand, or characteristics that appeal to different tastes
- commodities under certain defined characteristics
free entry and exit
- firms are able to freely enter and exit the market
- new firms can be created and begin producing goods and services
- existing firms can decided to shut down
- not essential condition for a competitive market
What is average revenue?
total revenue divided by the quantity sold
What is marginal revenue?
revenue generated by selling an additional unit of a good
When should the firm stop production in the short run?
P < min(AVC)
When should a firm make a long-run decision to exit the market?
P
What is the difference between short-run and long-run supply ?
firms are able to enter and exit the market in the long run
In a perfectly competitive market, firms are caused in the long run to :
- earn zero economic profits in the long run
- firms operate at an efficient scale
- supply is perfectly elastic
What is efficient scale?
quantity that minimizes average total cost
When are firms able to enter and exit the market?
- if economic profits are positive, firms enter the market, supply shifts outward until profits are zero
- if economic profits are negative, firms exit the market , supply shifts outward unitl profits are zero
