chapter 8 perfect competition

Question 1

industry

Answer 1

group of producers

Question 2

market

Answer 2

interaction of producers

Question 3

perfect competition characteristics

Answer 3

numerous sellers
identical products
easy entry
no control over price

Question 4

how is price determined for perfect compettion

Answer 4

-buyers and sellers both price takers

when Supply= Demand the equilibrium price is the price of the product

Question 5

what conditions must be met in order for it to be perfect competition ( not the same as characteristics)

Answer 5

• numerous buyers/ sellers
• consumers dont have preference
• easy entry and exit from market
• producers have all necessary info to make decisions

Question 6

average revenue

Answer 6

amount of revenue per one unit sold
tr/q
also the same as price= MR

Question 7

total revenue

Answer 7

Px Q
or MR x Q
or ARxQ

** not profit just how much firm makes from selling units

Question 8

Marginal Revenue **

Answer 8

extra revenue from producing one more unit
MR = change in TR/ change in quantity

MR=P=AR IN PERFECT COMPETITION

Question 9

total profit

Answer 9

T(pi)= TR-TC ** talking about economic profit

Question 10

break even output

Answer 10

level of output that sales revenues just cover the fixed and variable costs

** normal profit is a part of costs
so at break even revenue there is zero economic profit
Total profit= zero, TR=TC

MIN AC AT BREAK EVEN POINT

Question 11

min ac at what

Answer 11

break even point

Question 12

margins

Answer 12

change after increasing by one unit

Question 13

mr greater than mc

Answer 13

produce more mr curve is above mc curve, therefore you have not reached max profit, produce more to reach mac profit where MC=MR

Question 14

Marginal profit

Answer 14

**maximized when MR=MC
change in total profit divided by change in quantity
or MR-MC

Question 15

why is total profit maximized when marginal profit equals zero ( explanation )

Answer 15

as you near MR=MC, the total profit may be increasing or decreasing but the marginal profit will be above zero. when marginal profit equals zero the total profit has not increased or decreased at all therefore it is at the max amount that it can get to.. – the profit cannot increase anymore at this point after that marginal profit starts to decrease, below zero, although there still may be economic profit, total profit would be above zero its not at its max amount

Question 16

what to do if Q not a whole number when MR=MC

Answer 16

do not round up – max profit will occur when MR slightly larger than MC rather than when MC is slightly larger than MR so choose the smaller quantity

Question 17

average cost

Answer 17

tc/q

Question 18

average profit

Answer 18

total profit/ q WHICH IS EQUAL TO PRICE

Question 19

P= (in perfect competition)

Answer 19

MR
AR
(and MC when profit is maximized)

Question 20

TR=

Answer 20

PxQ
MRxQ
ARxQ

Question 21

TC=

Answer 21

ACxQ

Question 22

T(pi)=

Answer 22

TR-TC

A(pi)xq

Question 23

MR=

Answer 23

delta q

Question 24

MC=

Answer 24

delta q

Question 25

M(pi)=

Answer 25

MR-MC ``` delta T(pi) ------------- delta q ```

Question 26

which values do you need to know to max total revenue ( the important ones)

Answer 26

MR, MC and TC

Question 27

break even point ( on graph)

Answer 27

MIN AC - total profit = zero MR hits min AC TR=TC

Question 28

break even price

Answer 28

price at which firm only makes normal profit

Question 29

shut down point

Answer 29

if production is less the avc (average variable cost) - then firm must shit down or produce zero units so lost is only fixed cost -- MR = min avc at shut down point, if mr is lower than AVC then you make zero units to have a SMALLER loss

Question 30

supply curve

Answer 30

increase price increases level of production (quantity) where MR=MC-in order to maximizer profit therefore the supply curve above the shutdown point is known as the MC CURVE

Question 31

long run Total profit above zero

Answer 31

economic profit occuring= more people enter market-- increase supply-- decrease price-- MR= min ac now total profit= zero * firms continue to enter market until until economic profit zero * in long run the perfectly competitive firm will always have zero economic profit

Question 32

long run total profit below zero

Answer 32

firms are at shutdown point so some will -- decrease in supply --- increase price --- until break even point reached and total profit at zero again * firms continue to leave market until economic profit is zero - in the long run perfectly competitive firm will always have zero economic profit

Question 33

how much economic profit does perfectly competitive firm have in the long run?

Answer 33

zero

Question 34

increasing cost industry

Answer 34

industry grows resulting in cost of production/ resources increase long run supply curve upward sloping price increases as industry grows -- supply of resources and production is increasing

Question 35

constant cost industry

Answer 35

-price of production/ resources is constant while industry expands -- long run supply curve is a straight line

Question 36

decreasing cost industry

Answer 36

- prices of resources/ production fall while industry expands-- resource supplier may be experiencing economies of scale (ex electronic industry) the long run supply curve slopes downwards - as quantity or industry increases the price of the resources decreases