competitive markets Flashcards
what is the relationship between markets and the number of firms?
in general the more companies in a given market, the more competitive it is
what is the relationship between the differentiation of products and the markets?
in general when products from different companies are more difficult to distinguish from one another, the market is more competitive
what is the relationship between the barriers to entry and the markets?
if new firms can enter the market, the market is more competitive
what are the features of a perfect competitive market?
Many buyers & Many sellers
No product differentiation
No transport costs
Fully informed buyers and sellers
No costs of using the market
No transaction costs
Freedom of entry and exit
what are the consequences of a perfect competitive market?
Individual buyers and sellers have no market power
Individual firms are unable to influence market price by altering the quantity
produced
Firms are price takers
Market price solely determined by the forces of supply and demand
what is the demand curve look like for an individual firm in a perfectly competitive market?
it has a horizontal demand curve at the market equillibrium price. it is perfectly elastic
what is allocative efficiency?
price of the last unit sold is equal to the marginal cost of making it ie P=MC
what is productive efficiency?
ensuring that the inputs are allocated in an optimal way in the making of output
what is profit
the difference between a firms total revenue and total cost
where is the shut down decision in the short run?
if quantity is equal to zero then its then the profit is equal to - FC , if quantity is greater than zero then profit is equal to PQ- VC(Q) - FC
if the PQ-VC(Q) < 0 then shut down or if P< min AVC (Q)
in the long run what is the shut down price?
in the long run the firms will not stay in the buissness unless all costs can be covered by revenue. the long run supply curve for a perfect competitive firm is the portion of the MC curve above the LRAC curve
what is the short run supply curve for a perfect competitive firm?
the portion of the SRMC curve which is above the average variable cost
what is the market supply curve?
the horizontal sum of all individual firms supply curves
what occurs to the perfect competitive firm when there is an increase in demand in the market?
they originally operate at a point where they are making normal profits however when the demand increases, this will push up the market price therefore shifting up the demand curve and the average and marginal revenue. this will make it so the average revenue is greater then the average cost so the firms make economic profits. this will cause new firms to enter the market increasing the market supply and driving down the market price therefore pushing down the individual firm demand curve back to making normal profits where AC=AR and MC=MR
