chapter 9: perfect competition

Question 1

what is a monopolist market

Answer 1

market with a single supplier

ex: hydroquebec

PRICE SETTER

Question 2

perfectly competitive markets

Answer 2

have a very large amount of small suppliers of an identical product

many buyers present

nothing influences the market

each firm recognizes its own small size in the total market

it recognizes that its actions have no real impact on market price

they are PRICE TAKERS

Question 3

where do real life markets lien the economy?

Answer 3

in between the extremes of èrfect competition and monopoly

Question 4

profit maximisation

Answer 4

maximizing the difference between revenues and costs

the goal of competitive suppliers

Question 5

key attributes of a perfectly competitive market

Answer 5

1. must be many firms, each one small and powerless relative to whole industry
2. product must be standardized

EX: barber shops offering standard service (haircuts)

3. buyers have full information on price and quality of product or service
4. there are many buyers
5. there is free entry and exit of firms

assumes demand curve of each supplier is horizontal and infinitely elastic

demand curve of whole industry is downward sloping

Question 6

marginal revenue

Answer 6

additional revenue per unit of output sold

In perfect competition P = MR (price is marginal revenue), it is constant

Question 7

where is the shut down point on a graph

Answer 7

when the MC intersects the AVC

any price below does not cover variable costs, meaning the firm should shut down

No Production
Where
P < min AVC

Question 8

where is the break even point

Answer 8

when the MC intersects the ATC

profits are made when it goes above

Question 9

what does it mean when the MC is between the AVC and ATC

Answer 9

producer can cover variable costs but not total costs

should produce in the short run if costs are sunk

in the long run, firm should close if it can’t reach the ATC because all of the costs must be covered

if this is the case, the optimal output is the price at which he can cover variable costs that intersects with the MC

Question 10

firm’s short run supply curve

Answer 10

portion of the MC curve above the AVC

perfectly competitive suppliers face the choice of how much to produce and supply at given price to maximize revenue

firm’s MC (Marginal Cost Curve in the short run) curve crucial to find out how much is the optimal amount to supply

Question 11

where does it become the most optimal profit

Answer 11

when the MC is above the ATC

when the MC is lower than the price (revenue) of a unit (and when profits aint negative)

if the MC is bigger than price, might still make profit, but won’t be optimal, eventually, additional cost would exceed revenue

Question 12

how is the industry supply obtained

Answer 12

summing firm’s supply Q across all firms in the industry

horizontal sum of all firms’ supply curves

it is also the sum of each firm’s MC curve above the shutdown price

Question 13

short run equilibrium in a perfect competition

Answer 13

occurs when each firm maximizes profit by producing a Q where P = MC

price exceeds the minimum of the average variable cost

may only be temporary, have to find out wether it can be sustained or not (does it make profits)

Question 14

normal profits

Answer 14

essential part of firms’ operations

reflect opportunity cost of resources used in production

Question 15

economic profits

Answer 15

above normal profits

induce firms to enter and industry cause it gyuuu (start page 25 if missing info)

Question 16

what happens when new firms join a new gyu industry

Answer 16

supply increases and shifts to the right

Ep decreases, Eq increases

price is driven eventually where normal profits are made and entry stops

all of this with unchanged demand

Question 17

how to calculate revenue

Answer 17

difference between revenue per unit and cost per unit

Question 18

why is long run industry supply horizontal at the price corresponding to the minimum of a typical firm’s long run average cost curve

Answer 18

Free entry ensures that LR economic profits will be zero

If some firms produce at a low cost and others at a higher cost, the latter will not survive in the long run

Only those suppliers choosing the least cost production will survive

This least cost method involves producing at a point where the AC is minimal in the long run – i.e. the min of the LRAC

With zero economic profits this least cost must also be the price

Question 19

Equilibrium Long-Run Price =

Answer 19

Minimum of Long-Run ATC =

Long-Run Supply Curve

Question 20

If firms can chose different plant sizes, which size will they chose in the long run?

Answer 20

With many possible plant sizes to chose from, a supplier must chose the least cost one

it corresponds to the minimum of the LRAC

Question 21

what represents and increasing cost industry

Answer 21

When the costs of individual suppliers rise as the output of the industry increases

ex: landings at major airports

cost for long term curve starts going upwards

In terms of the firm’s LAC: additional suppliers cause it to shift up

Question 22

what represents and decreasing cost industry

Answer 22

When the costs of individual suppliers fall as the output of the industry increases

long term cost curve starts going downwards

In terms of the firm’s LAC: additional suppliers cause it to shift down

Question 23

what has increased the minimum efficient scale for many industries

Answer 23

reduction in costs associated with globalization

Globalization has also eliminated many traditional industries

Globalization also reduces the cost of components

Question 24

efficient market structure

Answer 24

Perfect Competition may represent this

It results in resources being used up to the point where the demand and supply values are equal

If these curves represent true costs and benefits then the equilibrium is efficient

If it is efficient it maximizes the sum of consumer and producer surpluses