Chapter 8 Flashcards
perfect competition, profit maximization, competition in the short and long run
What is a perfectly competitive market?
A market with enough buyers and sellers that firms are price takers
What are the characteristics of a perfectly competitive market? (and what anagram did I create)
Flying Unicorn Pegasuses Exist Now and Forever
1. Fragmented industry
2. Undifferentiated products
3. Perfect information about prices
4. Equal access to all resources
5. No transaction costs
6. Free entry and exit to the market
Why is the perfect competition market important?
It is a benchmark for the real world and if the real world strays to far, we may need to implement policies to bring it closer
What are the three cases to wether a firm shuts down or not?
- Minimum AC < p: you’re making money stay in business
- Minimum AVC ≤ p ≤ minimum AC: you’re running a loss, but reducing it by staying in business
- p < minimum AVC: you’re losing money by staying in business, shut down
What is the market supply curve?
the sum of all the individual firm’s supply curves
What is market demand?
The sum of all the individual consumers demand curves
Entry/Exit in the market in the long run
If profit is > 0 new firms will enter and if profit is < 0, firms will exit
What conditions are needed for market supply to be a horizontal line at a minimum average cost
There is an unlimited amount of potential firms that :
1. have the same cost fcn
2. have free entry/exit
3. Face fixed input prices for any level of inputs used
What three conditions must long run perfectly competitive firm’s equilibrium satisfy?
- Each firm maximizes long run profits
- Each firms economic profit is zero
- Market demand equals market supply
