Chapter 9: Perfect Competition

Question 1

4 Conditions for a perfectly competitive market:

Answer 1

• The existence of a standardized product
• Price-taking behavior on the part of firms
• Free entry & exit: Perfect long-run mobility of factors of production
• Perfect information on the part of consumers and firms.

Question 2

Economic Profit

Answer 2

Difference between total revenue and total cost, where total cost includes all costs - both explicit and implicit - associated with resources used by the firm.

Question 3

Accounting Profit

Answer 3

Total revenue less all explicit costs incurred.

Question 4

Normal Profit

Answer 4

The opportunity cost of the resources owned by the firm.

Question 5

Marginal Revenue

Answer 5

the change in revenue that occurs when the sale of output changes by one unit.

Question 6

Short-run Profit Maximization

Answer 6

happens whereby marginal cost equals marginal revenue.

Question 7

Shutdown Condition: P < min(AVC)

Answer 7

If price falls below the minimum of average variable cost, the firm should shut down in the short run.

Question 8

Break-even point

Answer 8

The lowest price at which the firm will not suffer negative economic profits in the short run.

Question 9

Allocative efficiency

Answer 9

a condition in which all possible gains from exchange are realized.

Question 10

Producer surplus

Answer 10

The rand amount by which a firm benefits from producing profit-maximizing level of output.

Question 11

Pecuniary diseconomy

Answer 11

is a rise in production cost that occurs when an expansion of industry output causes a rise in the prices of inputs.

Question 12

Pecuniary economy

Answer 12

is a fall in production cost that occurs when an expansion of industry output causes a drop in the prices of inputs.

Question 13

Price elasticity of supply

Answer 13

The percentage change in quantity supplied that occurs in response to a 1% change in product price.