Dynamics Of Perfect Markets Flashcards

1
Q

What is a market

A

An institution or mechanism that brings together the buyers and sellers of a good or a service

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2
Q

What is Marginal Cost and give the formula

A

The amount by which the total cost will increase when one extra unit of a product is produced
Change in Total Cost / Change in Output = MC

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3
Q

What is Marginal Revenue and give the formula

A

The extra amount of income earned when an additional unit of a product is sold
Change in Total Revenue / Change in Qauntity = MR

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4
Q

What are the two formulas for average cost

A

Fixed Cost + Variable Cost = AC
Total Cost / Total Output = AC
Also called unit cost

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5
Q

What is Average revenue and give the formula

A

The amount the enterprise earns for every unit sold
Total Revenue / Output = AR

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6
Q

What is another term for average revenue and why can we say this

A

Total Revenue = Price x Quantity
Average Revenue = Price x Quantity / Quantity
Therefore Average Revenue = Price

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7
Q

What is Average Variable Cost and what is its formula

A

Variable cost divided by number of units produced
Variable Costs / Total Output = AVC

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8
Q

What is Price

A

A value that will purchase a definite quantity, weight, or other measure of a good or service

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9
Q

What is Quantity

A

The extent, size, or sum of countable or measurable objects, expressed as a numerical value

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10
Q

Describe Perfect Competition

A

Market Structure with a large number of participants who are all price takers, there are no entry or exit barriers in the long run, all information is available to both buyers and sellers and a homogenous product is sold

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11
Q

What are three examples of perfect competition

A

Stock Exchange
Central Grain market
Foreign currency market

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12
Q

What do we mean by businesses being impersonal

A

Businesses strive towards maximum profit and only take its own cost structure into account when determining production levels
They are price takers

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13
Q

What is the first way to determine if the market is perfect when looking at a supply and demand graph

A

If the demand line of the individual business is horizontal, it is perfect

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14
Q

What does the horizontal demand curve of an individual business also represent

A

The marginal revenue curve

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15
Q

What is economic cost

A

Economic cost of production = Opportunity cost = Explicit cost + implicit cost

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16
Q

What is Explicit Cost

A

The actual expenditure of a business on the purchase or hire of the inputs required for the production process

17
Q

Give two examples of explicit costs

A

Wages of labourers
Rent on land and buildings

18
Q

What are implicit costs

A

The value of inputs that are owned by the entrepreneur and used in the production process

19
Q

Give two examples of implicit costs

A

Rent that could have been earned if the owner used his own building
Interest that could have been earned if the owner has instead invested their money

20
Q

What is normal profit

A

The minimum earnings required to prevent the entrepreneur from closing the business and using his factors of production elsewhere
Refer to Graph

21
Q

Where is the point at which normal profit is achieved

A

When average cost is equal to price
Total revenue = Total Costs

22
Q

What is economic profit

A

The profit made in addition to normal profits
Difference between total revenue and total cost
Refer to Graph

23
Q

Refer To booklet for Graph on Economic Loss

A

.

24
Q

Where is profit maximised under perfect competition

A

Where SMC = MR

25
Q

What is AVC (Average Variable Cost)

A

The per unit value
E.g. Labour Cost

26
Q

Where is the closing down point on a Supply curve graph of a business

A

Where the equilibrium point is below the Average Variable Cost

27
Q

What is the short term supply curve also known as

A

The market supply curve

28
Q

When is an industry in equilibrium

A

At the price that clears the market

29
Q

What are the two things that can change in the long run

A

New businesses can enter or leave the market
Businesses can adjust their production capacity

30
Q

Why do businesses ultimately end up making normal profit

A

The economic profit that businesses make will attract new businesses to the industry. The increase in supply as a result of more businesses entering and the current businesses expanding production will cause price to drop until it reaches P. At P, total revenue = total cost (Minimum on Long run average cost curve). This results in normal profit

31
Q

What is the result of the perfect market structure on price in the long term on a graph

A

Price of the product will settle at the lowest point on the LAC curve

32
Q

What happens once long term equilibrium is achieved

A

There will be no further entry or exit of businesses