Chapter 8

Question 1

What is perfect competition?

Answer 1

This is a market or industry in which many firms produce an identical product and there are no barriers to entry

Question 2

What is a market structure and how is it categorized?

Answer 2

This is a competitive environment in which firms operate. This can be based on three characteristics:
1. Number of firms: more firms, more competitive
2. Whether consumer cares which company made the good: more indistringuishable means more competitive
3. Barriers to entry: easier entry means more competitive.

Question 3

Apply the three market characteristics to the perfect competition structure

Answer 3

1. Number of firms: lots of firms
2. Type of products sold: identical product that is indistringuishable and homogeneous
3. Barriers to entry: none

Question 4

What are price takers.?

Answer 4

These are firms with no influence on the price and therefore take the price that is determined by the market when making decisions about production quantity. These are perfectly economic firms.

Question 5

Why do we need to study perfectly competitive markets if they are almost nonexistent?

Answer 5

1. There are some perfectly or almost perfectly competitive markets
2. It is used as a benchmark to measure the effiency of other market structures.

Question 6

What is marginal revenue?

Answer 6

This is the additional revenue from selling one additional unit of output. In a perfectly competitive market this is the market price. This is the same as the equilibrium price and demand curve.

Question 7

When do perfectly competitive firms maximize their profits?

Answer 7

At Marginal revenue = marginal costs.

Question 8

What dilemma regarding shutting down or keep operating do firms face in the short term?

Answer 8

1. Keep operating if Total revenue > Variable costs or AVC
2. Shut down when AVC are higher than Price

Question 9

How do you derive the short-term supply curve for a FIRM?

Answer 9

1. Determine marginal cost curve
2. Determine Average variable cost curve
3. Everything of MC-curve on or above AVC-curve is the supply curve.

Question 10

What is a firm’s long-run supply curve?

Answer 10

This is the part of the long-run marginal cost curve that is above the long-run average total cost curve (LATC=LAVC)

Question 11

What is entry?

Answer 11

Firms decide whether to enter based on whether entrance is profitable.

In short-run; number of firms in the market is fixed. In long-run there is free entry

Question 12

What is free entry?

Answer 12

This is the ability to enter an industry without having to overcome legal or technical barriers.

Question 13

what is the long-run competitive equilibrium?

Answer 13

Point at which the market price equals minimum average total cost and there are no economic profits to be made within the industry. This means there is still a profit (opportunity costs)

Question 14

What is free exit?

Answer 14

The ability to leave the industry without having to deal with legal or technical barriers. If the market price declines below minimum average total cost, currently active firms will leave the market.

Question 15

What is a constant-cost industry?

Answer 15

An industry whose firms’ total costs do not change when total industry output changes. This is one of underlying assumptions for why the long-run supply curve in perfectly competitive industries is horizontal.

Question 16

What is an increasing-cost industry?

Answer 16

An industry whose firms’ total costs increase as industry output rises. The long-run supply curves are upward sloping, as ATC increases as Q increases. Entry continues until price falls to the new, higher long-run average total cost levels.

Question 17

What is decreasing-cost industry?

Answer 17

Industry whose firms’ cost levels decrease with increases in the industry output. Slope is downward and entry will persist until price falls to lower minimum average total cost.