Chapter 8 Flashcards
How do farmers respond to difficulty in making money?
Switch crops
What happens to positive economic profits in the long run?
Attract competition
What happens to total cost at higher levels of output?
Slopes upward more steeply
How is profit calculated?
Total revenue minus total cost
What remains constant as the firm produces more output under perfect competition?
Marginal Revenue
What is the profit-maximizing condition for a perfectly competitive firm?
MR = MC
What does it indicate when price intersects marginal cost above the average cost curve?
Firm is making a profit
What is the break even point?
Price = Average Cost
What happens when price > average cost?
Firm earns profits
What is the shutdown point?
Intersection of AVC and MC
What is the market price for a firm in perfect competition?
Constant / Given
What do losses cause businesses to do?
Flee
What is the zero-profit level?
No economic profits
What happens to costs when demand for skilled labor rises?
Costs increase
In a perfectly competitive market, what is price equal to?
Marginal cost of production
What causes firms to exit the market?
Economic losses
Where does maximum profit occur?
Largest difference between TR and TC
What is a perfectly competitive firm’s pricing behavior?
Price taker
What happens when price equals average cost?
Firm is breaking even
If Price > ATC, what will the firm earn?
Economic profit
What happens when a firm operates below the break-even point?
It incurs a loss.
When does a firm stay in business?
Price > minimum average variable cost
How is total revenue calculated for a firm in perfect competition?
Price multiplied by quantity
What is the long-run response to sustained losses?
Cease production
What condition allows firms to continue producing?
P = MR = MC & cover AVC
What is the long-run outcome in a constant-cost industry?
More output at same price
What is the long-run equilibrium condition in perfectly competitive markets?
Economic profits zero
What happens when MR > MC?
Increase profit by increasing output
What does it indicate when price intersects marginal cost below the average cost curve?
Firm is making a loss
If Price = ATC, what will the firm earn?
Zero economic profit
What are the two options for a firm operating at a loss?
Continue producing or shutdown.
What determines output level in a perfectly competitive firm?
P = MR = MC
What happens if marginal costs increase at all output levels?
Firm produces less
Why do firms cease to exist?
Lack of profitability
What ends the process of rising prices?
Zero-profit level
What is the shape of the LRS curve in perfectly competitive markets?
Flat curve
What are the characteristics of a perfectly competitive market?
Many firms, identical products, free entry/exit
What determines a perfectly competitive firm’s level of profits?
Total revenue and total costs
What type of demand curve does a firm in perfect competition face?
Perfectly elastic demand
What happens when MC > MR?
Increase profit by reducing output
What is the rule for a profit-maximizing perfectly competitive firm?
Price = MR = MC
If Price < ATC, what will the firm earn?
A loss
What happens when market price is above the break even point?
Firm earns profits
What does P > AVC but P < ATC indicate?
Continue producing, economic losses
What is the main measurement for business operation?
Profits
What drives price to the zero-profit point in perfectly competitive markets?
Entry and exit
What does P < MC indicate?
Marginal costs exceed societal benefits
What is a perfectly competitive firm known as?
Price taker
How does revenue change with each additional unit sold by a firm in perfect competition?
Increases by market price
What occurs at MR = MC?
Profit-maximizing output
What is the profit-maximizing rule for a perfectly competitive firm?
P = MC
What happens to variable costs when shutting down?
Reduce to zero
What occurs at the break even point?
Zero profits
What happens if P < AVC?
Stops producing, incurring fixed costs
What happens to firms that cannot make money?
Exit the market
What is the long-run equilibrium condition in a constant-cost industry?
New price equals old price
What is achieved in perfectly competitive markets?
Productive and allocative efficiency
Who determines the market price of wheat?
Supply and demand
What indicates a positive profit margin?
Price > Average Cost
What happens if price falls below the shutdown point?
Firm shuts down
Can a perfectly competitive firm affect market price alone?
No
What does productive efficiency mean?
Producing without waste
Which market is commonly used as an example of perfect competition?
Agricultural markets
What indicates a negative profit margin?
Price < Average Cost
What is perfect competition considered?
Hypothetical benchmark
What type of demand curve does a perfectly competitive firm face?
Perfectly elastic
